The basic business of banks is taking deposits from public and pay interest thereon and disburse loan on interest. The difference between the interest payout and interest income is bank`s earning. Off course, now a days the bank expanded their line business which covers most of the financial segment in economy. The very survival of banking business depends on investing the fund s collected as deposits prudently. Obviously, no bank can avoid some bad debts; so more the bad debt less the profit. Keeping this in mind , banking industry as a whole prefer sanctioning loans against security, so that in case loan going bad, the dues can be recovered selling the securities. The best securities are gold, real estate, farm lands or any other immovable property and anything that has resale value and quickly disposable.

At times when the growth of industry slows down,the off take of funds by industries also becomes less. Then banks or other financial companies seek alternative channel to finance. The finance as once best said by one economist while answering to few students in a class " finance - well bank often does it; only proof they need that you do`nt need it"! The meaning is very clear, banks are ready to finance when the loan is fully secured. But at bad times, when banks or financial institutions are flush with funds and there is no taker, then they do risk investment. Risk investments include investing funds in stock or shares (though there is limit in most of the cases) or financing them with poor credit rating or bad credit.

To raise loan ; individuals need to submit credit reports or rating with the loan application, better the rating better the chance to get loan at lower interest rate. Individual credit rating is dome by some accredited agencies consider the records of loan repayments. When an individual fails to repay loans fully or partly or not able to maintain repayment repayment schedule, his credit rating goes down. With poor credit rating it becomes more and more difficult to raise loan.

When these people with bad or no credit seek personal, car loan or any other type like credit cards etc. , they find it difficult. The same people when seek home loan, it becomes bit easier, though one with bad credit has to pay in most of the cases higher rate of interest ( irony !). This is because the home loan are disbursed against the security of home as collateral. Bank or financial companies feel the loan is secured and yielding (since they earn higher rate of interest). Further more the real estate price till recently was expected to go always high. So banks and other financial companies find to advance with comparative ease in this sector , at the time when economy is passing through recession resulting unemployment of thousands of citizens.

But , such home loan programs are not always successful as recently the sub prime fiasco overshadowed US economy and had a disastrous effects on banking and financial industries as a whole. The real estate price going down, the home loans and the home mortgage loans became bad with borrowers unable to make repayments cause the bubble bursts. With the total amount of home loans with bad or no credit running billions of dollars getting bad; the final result or impact of that is yet to ascertained. But the symptoms are spelling doom. A new chapter of economics are required to written when the dust settles.

Learn more about this author, Abhiroop Bhattacharyya.
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