Forum Post: Incentives for the banks to lend to the Micro- Sector.

' With the world in a financial crisis for almost for three years now, it looks like nobody has a remedy so far. The governments have reduced the bank rates so low, and do not know where to go from there. The budget deficits are hitting the ceiling or have hit the bottom, depending on which way you look at it.

Is it because there is no money available? No, there is enough money in the banks, but there is no incentive for the banks to lend.

How would you tackle such a concern. Of course, the governments could insist that the banks should touch a certain level of Credit-Deposit ratio. However, the banks will not be enthused because there is no incentive for them in doing so. Even if the there are incentives, the banks will go back to lending it to the corporate sector as always, which again is going to create a glut in the market. Of course, the current situation is not due to glut, but due to hyped up lending.

However, in the current situation, if the governments could give banks incentives for lending money to the Micro-sector, the economy will get a much needed boost and the multiplier effect would be much more pronounced.

For example, in the US the total bank deposits is close to the tune of $7 trillion and if there is an incentive more deposits may flow into the banks and let us say it touches $10 trillion. Even if the government should give an incentive of say, 3% per annum to banks for the average daily owing balances on loans, mortgages, credit cards, student loans and other line of credits to the Micro sector and say if all of this money is lend to the Micro-sector, the government ends up paying $300 billion dollars in incentives, which is just 1/5 th of the debt ceiling of $1.5 trillion the Obama government received recently.

However, the incentive should be calculated and provided only up to the daily available deposit balances in the bank's deposit accounts on a pro-rata basis.

Otherwise, you will have serious repercussions.

Once this money starts circulating, the tax earnings of the government will increase and in a short period of time the government will be able to come out of the debt spiral.

Now, you may ask why incentives only to the Micro sector. The Micro sector because the Micro sector production may not create a glut in the market.

Further, you may ask how do you define the Micro sector. Well, the federal government should be allowed to decide how they wish to define Micro sector basing it on market conditions.'