Question

5. Describe three different governmental policies that either directly or indirectly encourage lending by private banks. (10 pts)

Answer 1

5.

The first policy is the government loan guarantee scheme where loan issued by private banking, is guaranteed by the government.  It makes banks to lend to people under the scheme that in case of default, will be repaid by the government.  The second policy is the government sponsored programs to promote entrepreneurship, primary sector lending and other similar initiatives, where lending made by the banks is essential to go some part of it to the government sponsored programs. In this case also, banks lend, as it is protected by the government in some capacity when default takes place. The third policy is the government initiatives to spend money and give jobs that create employment and private banks identify these individuals as customers and give loans to them. The increased level of purchasing power, make them pay the loan with ease.

6.

The first method is the disclosure of important documents and past records, financial statements that make people or investors to understand the financial instruments issued by the company. It will reduce the information asymmetry. It will reduce adverse selection. The second method is to setup internal regulatory & risk management  framework as per the guidelines of the government laws and regulations. It will prevent the scope of fraud and malpractice in the organization. It is used to prevent moral hazard.