How might government-directed credit help poor entrepreneurs to escape

How might government-directed credit help poor entrepreneurs to escape the “tyranny of collateral”? What side-effects might undermine the effectiveness of such a program?

What will be an ideal response?

ANSWER

A government run or influenced bank can ignore profit motivation and risk aversion to target underserved businesses on favorable terms involving little or no collateral. With competent screening, monitoring, and support services, the outcome can be profitable investments. The danger of moral hazard is acute, however. Markets achieve efficiency by removing resources from people and projects that are underperforming, but a program designed to be friendly to struggling businesses is unlikely to be good at recognizing lost causes and abandoning them. Moreover, the disregard of market standards makes it easy for the allocation of funds to be determined by political and social ties, to the detriment of economic performance.