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Risky business

Risky business

Small businesses are on the rack, while lenders are back to high-risk customers. Kipp finds that the credit woes of SMEs could wreck entire global recovery – from MENA to the US.

August 8, 2010 12:31 by

Consumers aren’t the only ones struggling to pull themselves out of the credit crisis: lenders are in the same economic boat. And some US analysts see a contradictory, and potentially dangerous, pattern emerging as big financial institutions begin courting risky borrowers with tempting deals to “get back in the saddle” and borrow again.

The credit crunch is easing, analysts contend, but some are voicing concern over what is viewed as a “potentially dangerous infatuation with risky borrowers,” the Wall Street Journal reported last month. “From credit cards to auto loans to mortgages, the hunger for new business as the crisis ebbs is causing some financial institutions to weaken lending standards and woo borrowers who mightn’t be able to pay,” the report said.

Credit is easier to come by in the US, loosening its stranglehold on individuals and big firms, in spite of negative credit histories. Large financial firms, in particular, are hungry for new business, amid optimistic signs that the recovery will sustain momentum. Big lenders are looking to get a piece of the action, as indebted borrowers emerge from bankruptcy proceedings or home foreclosure. And American consumers hit hard by the recession, those who may have lost homes and defaulted on debts, for example, are eager for the cash and the credit to start over – second chance home loans, new credit cards, and all the things necessary to participate in the economic upswing that analysts cautiously predict is in the making.

But amid the flow of easier money, analysts are also eying the lending patterns of small banks that typically serve the credit needs of small businesses. Stimulating the business environment with reasonable access to cash is critical to the recovery, says US Federal Reserve Chairman Ben Bernanke. These financial institutions are saddled with the daunting responsibility of providing small business with funding, while avoiding risky lending patterns that could spell disaster for individuals and the wider economy.

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