Question

In your opinion, what is the effect of the banking sector clean up on investment decisions of

a.Individuals

b.Household

c. Firms.

Answer 1

Cleaning up of a bank is a process od generating liquidity from the Non-Performing Assets (NPA) held by the bank. Processes that are followed for this purpose can be divesting, liquidation, actioning, etc.
This process of clean up ensures that the bank doesn't get hurt by its NPAs and remains functional in the market.
By doing this, the bank's current profits reduce but in the long-term, they get benefitted from the cleanup as this ensures that the bank doesn't face any sudden losses arising out of credit risk that hasn't been accounted for earlier.

Cleaning up for a banking sector yields impacts on the entire economy and all the constituents of an economy like individuals, business sector, government, private and public investment, etc.

This process impacts the investment decisions of individuals by building trust in the banking sector. An individual on a general basis remains dependent on term investment and other banking investment schemes for his investment needs in order to meet several personal financial goals. In the situation of weak banking practices, it is always likely that the banking operations get hampered due to insufficient funds resulting from several NPA losses and the bank is further not able to pay its depositors back their investments made with the bank. And, this situation will make the individual investors turn away from the banking sector and look for other avenues to park their money for investment purpose.

In a very similar manner, the process of banking clean up will impact households investment decisions. It is mainly the household's investment that helps the business sector of the economy run by getting the required financial aid. The amount of household investment in the banking sector is directly related to the health of the business environment of the economy. If the banking sector is laden with huge NPA losses then banks would neither be able to handle the deposits and investments of the household sector and nor will able to pass on loans and financial help to the businesses and firms. This further will waken the entire economy as the movement and rotation of money in the hands of individuals, households, and firms will stop or get slow. And lack of money in hands of people would take the economy towards deflation as demand for the goods and services will decrease and supply will keep going up. And this further will impact the investment decisions of the firms as they will start investing less in their businesses and safeguarding hard cash would become a priority for all the constituents of the economy.   

Hence, the pricess of cleaning up banking sector directly impact the investment decisions of individuals, households and firms and it is of utmost importance that banking sector of an economy remains healthy and the process of cleanup ensures that.