How Credit Drives the Economy? – Credit Driven Growth5 min read

How Credit Drives the Economy? - Credit Driven Growth

The new world, the gen-z believes in living life to the fullest with great ideas, business plans and innovation for the future. Getting ideas, workers and engaging markets is a big bang need but what’s all above that? Yes the finances, the input cost and the burden of risk returns and losses.

So in the new age of growing economy, the growth depends on the growth of innovative ideas supported by financing and backed up cushions of funds primarily depending upon credit and lending capacity of any emerging economy. 

Credit is the key source of money when you can’t afford to pay the bills at a point in time and the future holds repaying the debt. A more sensible approach to this system is at a macro level, getting the benefits of the lending economy, manage those pools to create your profit, repay the debt and now enjoying the surplus. The credit sources and the capacity in an economy largely define the growth of GDP and how the business sectors revolve around in addition to household demands for consumption.


Factors affecting credit systems and how they drive the growth

  • Monetary policy and government policies 

The functioning of banks and number of the financial institution and their regulation systems affects the credit facilities to a large extent in the economy. so do the policies for finances and restrictions plays important role in determining the volume of credit flow in the economy available to the population and business. The major and most important factor of credit and debt remains the interest rates.

Regulation of interest rates timely affects the finances and opportunities with the population to manage their surplus as well as deficits. The people with surplus lend to the people with deficits through intermediaries, gaining interest and the borrowers incurring the interest as the cost of credit.

Interest rate governs the system, leading to high volatility in economic trends and capital markets with goods market affecting investment opportunities. The taxation slabs also affect the credit taking capacity of the economy as it directly affects the profits with the economy driving business.


  • Level of employment and future growth prospects 

The number of people who earn more makes a population who can lend, and the population earning lower builds up the pool of borrowers in the economy at a micro-level. The general phenomenon works at the cycle of depositing surplus to financial institutions and the borrowers exposed to deficits finance it by taking loans for personal and other needs like housing loans, health loans etc. these are examples of long term credit-driven personal financing, the other way round short term benefit of the credit is passed to borrowers by the means of short term loans or basic credit cards which facilitates buying today pay later psychology.

Talking about macro output, the future prospects of a business or venture for expansion again depends on funds. These funds can be equity or debt but mostly viewed scenario is that both are affected directly or indirectly when any of the credit factors change. The cost of credit has to be low as compared to the rate of returns from expansion to generate feasible profits, therefore credit cycle and tenure of credits highly decide the growth.

How Credit Drives the Economy? - Credit Driven Growth

  • Capabilities of credit takers in economy

The very basic argument arises not just for the availability of credit but on how the borrowers can repay. The bankruptcy phenomenon is very tiring for the economy to deal with. The credit system fails to expand the growth opportunities when the population is incapable of repaying. The risk factor of credit systems lies in this place of capabilities and financial conditions of the economy as a whole. Stability of profits for a firm going for expansion arranging for credit, and stability of income source for an individual seeking for loans or debts is a big driver of accessible credit.


  • The ability of economic trends to absorb the losses

When viewing the analysis of how many people or firms would need credit facilities, economic trends try to figure out the loss bearing capacity and how much can be the loss absorption for credit engagement. Supposing a business unit is driven on the credit of $3 million and is backed up with finances of $1 million if in future the product range undergoes losses, the business backing up is not sufficient to pay the debts, therefore the creditor’s money going into will not be coming back.

In this case, the economy or the firm individually was not having a loss planned out and therefore credit system will collapse. Absorption of losses does not mean high amounts of surpluses but implies how much will the economy bounce back on credit when exposed to losses.

Therefore credit is an opportunity with risk alongside.


  • Consumption patterns of consumers in the markets 

Personal credit and loans have been an easy option for the population for financing their present expenditures with future payments. This has created a strong impact on demand-side factors for goods markets. Easy availability of credit facilitates high consumer demands and therefore the dependence on credit in this decade is evergrowing. As discussed above, credit cards are being readily used in place of cash as they improve the purchasing power in hand and creates enough liquidity for driving the economy. 

How Credit Drives the Economy? - Credit Driven Growth

  • Debt and equity analysis of active investors 

This is also a deciding factor for demand for credit in the economy. If we suppose that investors in an economy are highly sensitive towards the capital markets and equity investing, this will create an ease for business particularly to generate funds at a lower cost than credit. Whereas if the behaviour of investors in an economy is more inclined towards other deals, the firms requiring funds have to depend on credit in any case. 

Therefore economies with high volatility and turbulent markets often see high credit reliable population.

The economy is said to be driving the credit and the reverse role is evident in driving the economy.


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