US Small Business concern- lack of credit or demand?

Fed Governor Ronald Krozner has given an excellent speech on the status of small business lending in US. I had pointed to a few papers on the issue of whether bank lending has declined or not in US. 

This speech pretty much confirms that bank lending situations has worsened in US. Krozner does not rely on the statistics but various surveys conducted by Fed and other agencies. He even looks at whether large firms are facing similar concerns to small firms.

To summarize our conclusions, the information that we have received since April from both banks and small businesses suggest, rather convincingly, that over the last six months it has become more difficult for small businesses to access credit, but that at the same time, small business demand for credit has declined. 

Commercial banks, the most common source of credit for small businesses, have generally both imposed more-stringent credit standards and increased interest rate spreads and fees.  In addition, deteriorating financial positions in both the small business and the household sectors are almost surely reducing the creditworthiness of many small businesses and thereby constraining their access to credit.  That being said, the information we have on the volume of small business loans suggests that credit is generally available, albeit on significantly stricter terms.

In the previous post, I had said there were concerns over whether this decline in bank credit was demand driven or supply driven? Krozner throws some light on the matter:

In addition, small businesses generally report that reduced demand for their products and services caused by a lower level of economic activity is a more serious concern than is the tightening of credit supply conditions.  Put differently, while credit supply concerns are real, the weakened state of the economy appears to be the more serious challenge facing most small businesses in the current environment.  Importantly, there is some evidence that concern over access to credit is relatively stronger at larger businesses. 

 So, Krozner indicates the concerns have indeed moved to demand side where the small businesses are expecting overall demand to decline. Hence, the decline in credit could be demand driven as well.

This speech points US has plenty of data sources to access the situation. In India’s case (and other economies) we hardly have any sources of this type.  And it is so difficult to assess the situation.

One Response to “US Small Business concern- lack of credit or demand?”

  1. US Small Business concern- lack of credit or demand? « Mostly … | forexintraday.com Says:

    […] Read more […]

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