Notes

How Will the Finance Sectors React to the Economic Decline?
Finance refers to the activities that support economic activity. There are many finance sectors in the market. Broadly, there are three types of finance including micro-finance, small/ midsize finance and large-scale finance. Micro-finance is involved in providing personal or home loans, which include the personal loan, credit card loans, payday loans, etc. Micro-finance institutions do not engage in the commercial activities like purchasing goods and services.

Small/Midsized Finance: Small/ midsize finance sectors are mainly interested in providing bad credit car loans, personal loans, etc. digital have less investment in the stock market and are thus more focused towards short term investment. They generally follow the buy-sell agreement for making business decisions. For a successful run, these small/midsized finance sectors should be encouraged to follow the macroeconomic news and policies carefully.

Broad Financial Market: Broad financial markets are those with enough space between demand and supply. The goods and services produced by the small/midsized finance sectors can meet the national demand. The demand is based on the overall economic recovery. However, the overall economic recovery will not help the small/midsized finance sectors if their credit quality has not been damaged due to recession.

Broad Financial System: A problem faced by all finance sectors is the lack of a system to absorb the surplus cash created by the business operations. For instance, a new project that creates ten times the number of jobs needs two hundred million dollars. Such excess cash will need to be invested in order to generate twenty times the number of jobs. Such excess cash will have to come from somewhere. It could either come from bank reserves, savings, income from dividends, etc or it could be extracted from the consumers.

Cloud or No cloud: The cloud is a new concept that was recently launched recently by Bill Gates and Steve Jobs. According to them, there will be no need for any finance sectors whatsoever as the money will be available virtually. What is meant by this is that the money will be there in the cloud. Every time, the workers will get access to it and spend as they wish. This idea is similar to the concept of the Internet. However, this is not very appealing to the smaller and midsize banks which do not have any expertise in information technology and internet.

No New Business: The other option that the finance sectors will adopt to handle the new business requirements is the reduction of most of their current work force. This means that fewer employees will be added and fewer positions will be terminated. In February, the government had announced that it will reduce the workforce by one million people by the end of the year. However, most experts believe that this reduction will be more than required. Hence, many experts have predicted that the fall in business activity will lead to the fall in employment.

Financial System: The financial system is the backbone of the Indian economy. In fact, it is the engine that drives the Indian economy. When the financial system of banks is not functioning properly, the overall economic performance of the economy will be seriously affected. There are three main problems that the financial system faces - cash flow, liquidity and capital formation. All these problems affect the banking sector adversely.

Other sectors: Since the finance sector comprises of various other sectors like real estate, insurance, health care, etc., these will also have to adjust with the changes in the economy. However, most of the time, the impact will be on the industrial sector. For digital , the construction industry will experience some tough time until the boom ends. There will be a period of retrenchment in almost every sector in the economy, leading to a period of stagnation.
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