| Summary: | “Why do banks squeeze their lending activity” is an oft-repeated question during the times of
financial crisis. This study examines an emerging economy’s banking system, and contributes
to the evolving body of literature on the topic by providing answers to what causes the
sluggish bank credit during times of recession. By employing cointegration technique, the
study shows that bank credit has a significant positive relationship with the borrowing
activities of debt users of the banks, hence, as the contrary an inverse relationship with
investment activity is evident during financial crisis. Accordingly, we suggest that banks
could increase their lending by increasing the borrowings rapidly either from the Central
Banks or from Government supported long term lending institutions during recessionary
periods.
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