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Sources of public borrowings

  • There are two major sources of borrowings internal and external. internally, the govt. can borrow from individuals, commercial banks, financial institutions, charitable trusts and the central banks in a country. Externally, the govt. can borrow from individuals, banks, international financial institutions and foreign govts. Here, we shall brief these different sources of borrowings
  • (A) Internal sources.
  • 1. Borrowings from individuals.
  • 2. Borrowing from non- financial institutions.
  • 3. Borrowing from commercial banks.
  • 4. Borrowing from the central govt.
  • (B) External sources
  • Govt. may borrow from other countries, apart from borrowings from individuals and financial institutions within the country the borrowings can be used to finance war expenditure or to buy defense equipment or to pay for the development projects or to pay off adverse balance of payments. In the past, floating of loans for any specific projects like railway of dam construction was taken up by the individual, banking and other financial institutions.

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  • (A) Internal sources.
  • 1. Borrowings from individuals. When individuals purchases government bonds, they are diverting funds from the private use to the govt. use
  • 2. Borrowing from non- financial institutions. Borrowing from the non banking financial institutions is another source of borrowing. They are insurance companies, trusts; savings banks etc.
  • 3. Borrowing from commercial banks. The banking system can make additional loans up to an amount several times as great as the excess cash reserves and required reserve ratio.
  • 4. Borrowing from the central govt. The central bank of the country can subscribe to the govt. loans. This action is similar to the system of creating purchasing power by the commercial banks.

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  • (B) External sources
  • Govt. may borrow from other countries, apart from borrowings from individuals and financial institutions within the country the borrowings can be used to finance war expenditure or to buy defense equipment or to pay for the development projects or to pay off adverse balance of payments. In the past, floating of loans for any specific projects like railway of dam construction was taken up by the individual, banking and other financial institutions.

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