How does the Decrease in Credit Effect Businesses?

An article was published on the “Calcalist” website that connected the trend of decreasing commercial credit to the slowdown in the market. According to the article, in the first quarter of 2014 the demand for credit has dropped by 5 percent. This amounts to 12 billion NIS. That credit, which the big companies gain, is an engine for growth that allows them to initiate projects, recruit employees and expand. The article stated that the commercial credit that the banks gave to companies dropped by 3 percent in comparison to the previous quarter. The decrease amounts to 6.7 billion NIS.

Up until not too long ago it was possible to think that the loss of credit of banks was a result of the institutional entities providing credit, but data from the “Midroog” company indicate that even this channel is experiencing a decreasing trend. The article additionally explainedthat it is possible to observe the decrease in commercial credit among small and medium sized businesses.

Representatives within the banking system claim that the decrease in commercial credit stems from a decrease in demand for credit – since the large companies are disinterested in receiving loans and creating more projects. There are those who claim that the decrease in credit arises from a problem of supply – in other words, the ability of the banks to lend money, due to the limitations of the regulator of the banks. My argument is that the banks have no issue lending money to small and medium sized businesses – in this case there only considerations are credit considerations.

The Decrease in Demand – Due to the Decrease in Consumption in the Market

In most cases, when there is an increase in the activity in the market, one of the indicators of this is the growth in the demand for credit by large commercial clients, medium sized clients, small businesses and even households. In the case of consistent growth, an increase in credit can be seen. With this in mind, when there is moderate growth, entry into a recession or lack of growth, a decrease in credit is detected. Businesses are weary of the situation and therefore request less credit. The same applies to private individuals who consume less and therefore require less money. These processes usually span over a long period of several years.

In most cases, when there is an increase in the activity in the market, one of the indicators of this is the growth in the demand for credit by large commercial clients, medium sized clients, small businesses and even households. In the case of consistent growth, an increase in credit can be seen. With this in mind, when there is moderate growth, entry into a recession or lack of growth, a decrease in credit is detected. Businesses are weary of the situation and therefore request less credit. The same applies to private individuals who consume less and therefore require less money. These processes usually span over a long period of several years.

I estimate that the drop in demand for credit mentioned in the article, arises from the decrease in consumption in the market, for example, the export of medium sized companies in Israel is damaged as a result of the Shekel being strong in comparison the Dollar. Of course, companies that export less require less credit for working capital. Therefore, the decrease in credit is an additional indicator of the lack of growth in the market. An additional indicator is the decrease in the revenues of the major retail chains – part of the reason for this is that the consumers look for bargain prices and a portion of the consumption is transferred to smaller chains.

The Increase in Direct Credit of Institutional Entities

A statistic was presented in the article according to which in 2014, the non-bank credit surpassed the bank credit for the first time. In the last two years we witnessed a rising trend in the direct credit provided by institutional entities. These entities have large surpluses for investment, as a result of the fact that they receive pension fund money and executive’s insurance money. Moreover, the funds that they lend are not for households and small and medium sized businesses. The loans are given to large clients. As a result of the crisis in 2008, limitations were placed on banks, which meant increasing self-adequacy. The banks have an interest that the credit for larger clients will be taken from institutional entities, in order to encourage improvement in capital adequacy, such as a decrease in the centralization of the credit portfolio of the banks. The risk involved in this is that a significant portion of the loans is transferred from the banks to the institutional entities and in the case of significant bad debts this could hurt the pensions of the Israeli public.

In summary, from the various published statistics, it is possible to see that the decrease in credit exists in all the markets. This is an indication of the suspension in growth in the Israeli market.

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