A & D is a private commercial bank working since 2002. It employs over 3500 employees at 36 branches all across the country. Its balance sheet depicted total assets worth Rs 35.5 billion ranking it one among the top 15 commercial banks at December 30, 2006. With the advent of global recession in the banking industry, the change in the interest rate resulted in decreased value of its assets ultimately increasing the liabilities, back in 2009. Gradually it succumbed to the prevailing crisis and left with the only option to approach the central bank to lend it a helping hand.
The central bank upon the receipt of the request, constituted a committee of five members for this purpose. At the end of a thorough analysis, it delivered a decision to provide "short term loan" to the crisis stricken bank so that it may deal with the issue of liquidity.
Requirement:
- The decision of central bank to provide loan to commercial bank was correct or not? (5 marks)
- Either yes or no support your answer with logical reasons. (20 marks)
(Note: if no, you are required to identify the mistake with logical reasoning.)
- What will be the result of the action/ decision taken by central bank? (5 marks)
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