Question

As a result of the global Covid-19 pandemic and lockdown, central banks around the world have stepped in to provide massive liquidity to the capital markets. Among the key policies are to keep interest rates low or sub-zero (zero interest rate policy or ZIRP). Discuss the implication of such policies to credit risk management from the perspective of adverse selection and moral hazard.                                            

Answer 1

The given question can be analysed as below:

1. Topic: Covid 19 pandemic and its impact on the economy

2. Analysis:

The Central Banks around the World have inserted financial stimulus in order to provide liquidity and fund cycle in the economy. The Fund Cycle includes Funds availability, Funds Allocation and Funds utilisation.

The inflation needs to be kept to a minimum level - This is achieved by the Central Bank by instructing the Commercial Banks to provide interest of lending at a very low rate and in some cases it is kept at zero rate. The funds needs to be utlised efficintly, so the Finance Minister of respective countries are giving the updates.

A massive amount of investment is done with regard to different employment schemes.

Education sector is revolutionised by providing digital system of education. For this purpose, various e-learning platforms are developed.

Differnet investment portfolios are done towards medical equipment and manpower in the filed of medicine.

As part of Covid -19 anxiety, various countries also had disputes with China, as the Corona Virus was first identified in China and was named as "China Virus".

Terrorism and crime rate is at an all time high.

All the above factors have resulted in increase in defence expenditure by various Countries

About 10 Lacs people have lost their lives.

3. Conlusion:

Positive aspects w.r.t Credit Risk Management:

1. The innvestment ratio has increased due to fall in the Real Estate prices.

2. Many countries are encouraging start-ups as well as domestic manufacturing units.

3. A complete digistisation of the economy has happened.

4. Various pharmacuetical companies across the World are investing for the generation of Anti-Covid Vaccine.

5. Various chit funds are closed.

Negative aspects w.r.t. Credit Risk Managemnent:

1. Loss of existing employment opportunities by way of lay-offs.

2. Liquidity crunch in the economy.

3. With holding of investments by the people in various commercial banks

4. Lack of proper education facilities for children in the rural areas.

5. Migration from one city to another which has resulted in health risk and cost of transportation.