Final answer:
Commercial banks are often reluctant to extend credit to SMEs due to the higher risks involved compared to larger corporations. Banks can monitor an SME's financial health through transactions, implying a more customized lending approach. The caution of banks, notably during periods of economic downturn, greatly influences the availability of loans and, consequently, economic activity.
Step-by-step explanation:
The question at hand is whether commercial banks are often reluctant to extend credit to SMEs (Small and Medium-Sized Enterprises). This hesitation is due to the higher risk associated with SMEs as they may have a limited track record, less collateral, and a narrower capital base compared to larger businesses. As such, banks are cautious in offering loans to SMEs, particularly in light of global economic and financial events that have shown the consequences of stress in the banking sector. This caution was exemplified during the 2008-2009 Great Recession, where banks under financial stress massively scaled back their lending activities, which adversely affected various sectors dependent on borrowed money, like business investment, home construction, and car manufacturing.
Bank borrowing typically offers a more customized finance solution for SMEs, as banks can closely monitor the firm's financial activities through their account transactions. Moreover, because the process of banks making loans is intimately connected with money creation, banks play a pivotal role in economic stability and growth. Therefore, banks' reluctance to extend credit to SMEs could signal an overall reduction in loan availability, impacting economic gains.