Question

1. What type of relationship would you expect to see between the following variables? Fully explain.

A. Delinquency rate on credit card loans at all commercial banks and percentage change in HouseHold Net Worth?

B. Delinquency rate on credit card loans at all commercial banks and RGDP Growth?

Answer 1

Credit card loans are one of the most common way of taking credit in the world economy. Delinquency rates on credit card loans are a very strong indication of the existing financial situation in an economy.

When an economy does well, growth rates are high, disposable incomes are growing, jobt creation is healthy, unemployment rates are low, the delinquency rates on credit card loans would be lower, but as the the economic situation gets tough, unemployment is high, disposable incomes are not growing, the defaults on credit card loans go up.

In simple words, delinquency rates on credit card loans are an indication of public's financial ability to pay off their liabilities on time, which is directly dependent on the levels of economic growth, opportunities and disposable incomes.

Relationship between % change in household net worth and delinquency rates on credit cards:-

Household net worth refers to the value of net assets owned by an average family in an economy, i.e. Market value of all the assets owned by a family reduced by all its outside liabilities. % change in net worth during a year indicates the net amount that gets added or reduced to net worth of a household.

% change in net worth, in other words, indicates if a family is making more money than they are spending or the other way around. When the economic situation is good, % change in household net worth would be positive and vice-versa.

If % change in household net worth is positive, it means that the financial situation of an average household in the county is good, the disposable incomes are high, hence the public would pay off their liabilities when due, resulting in low delinquency rates on credit card loans.

Similarly, if % change in household net worth is negative, it means that an average family is spending/losing more money than they are making, their financial condition is not great, disposable incomes are low and hence the defaults on their liabilities will go up, resulting in higher delinquency rates on credit card loans at commercial banks.

Relationship between delinquency rates on credit card loans and GDP growth:

Growth rates of National Gross domestic product (commonly known as GDP) and Regional Gross domestic product (RGDP) are indicators of well being of economic activity in a country and regions respectively.

When the GDP growth rates are high, the unemployment rates go down, job creation is good, disposable incomes are high, rates of savings and investment in the economy go up, which means that the general public are doing well off financially and hence are very able to pay off their liabilities on time, resulting in low delinquency rates on credit card loans at commercial banks

On the contrary, when GDP or RGDP growth rates are low, it means that the economic activity is slow in the country or region as the case may be. This means that the financial situation of the general public is not the best and hence they would not be able to pay off their liabilities on time, resulting in high delinquency rates on credit card loans at commercial banks.