Self liquidating paper theory

Fourth, the general demerit of this theory is that no loan is self-liquidating.

At this point, the company will have generated profits from the busy season, and will now be able to use those profits to repay the loans it took out to finance operations during the busy season. See Also: Loan Agreement Collateralized Debt Obligations When is an interest rate not as important in selecting a loan?As a result, it makes it impossible for existing debtors to repay their loans in time.Second, this theory believes that loans are self-liquidating under normal economic circumstances.Now banks obtain sound assets which can be shifted on to other banks. Firstly, only shiftability of assets does not provide liquidity to the banking system. Secondly, this theory neglects acute depression, the shares and debentures cannot be shifted to others by the banks.Shares and debentures of large enterprises are welcomed as liquid assets accompanied by treasury bills and bills of exchange. In such a situation, there are no buyers and all who possess them want to sell them.First, they acquire liquidity so they automatically liquidate themselves.Second, as they mature in the short run and are for productive ambitions, there is no risk of their running to bad debts.There are probable contradictions between the objectives of liquidity, safety and profitability when linked to a commercial bank.Efforts have been made by economists to resolve these contradictions by laying down some theories from time to time.If there is depression, production and trade deteriorate and the debtor fails to repay the debt at maturity.Third, this theory disregards the fact that the liquidity of a bank relies on the salability of its liquid assets and not on real trade bills. The bank need not depend on maturities in time of trouble.


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