Types of credit commercial bank prefer to finance & its reason
Commercial bank is a financial business
institution. Profit is the main target of
such institution. Again commercial banks are bound to repay the deposit money to the customer. so commercial banks prefer short term credit than long term credit for earning profit. the main reason for
preference to finance short term
credit
are given below----
1. Liquidity
act—commercial bank are bound to repay the deposit to its
customer
at
demand. For this reason commercial bank give short term credit so that they can easily convert it to cash. Liquidity does not exist in long term
loan.
2. Risky activities-
approval of
long term loan is risky and so, banks prefer short term lending.
3. Earning of profit- the more you will use the invested money the more you
will earn profit but in case of long term
lending investment cannot reuse.
As a result profit margin become low. So, banks prefer short term loan.
At last we can say that considering
on profit margin, risk factor
and
liquidity condition commercial bank prefer
short term
loan than long term
loan.