Interactions between Institutional and Informal Credit Agencies in Rural India

In an attempt to expand rural credit and displace the villagemoneylender, India created a system of rural cooperatives inthe 1950s and expanded branch banking into rural areas in the1970s. This article examines how these measures affected therural market. It begins with the question of how large the expansionof institutional credit has been and the extent to which ithas dislodged the village and nonresident moneylenders. A detailedcomparison of three major surveys of the Indian rural creditmarket suggests that in various guises, the moneylender is stilla major source of loans. The article also examines the (weak)evidence on intermediation between the formal and informal sectors.A formal model of the interaction between the informal moneylenderand institutional lender is constructed under a variety of assumptionsabout the exclusivity of loan contracts and the competitivestructure of the informal sector. The conclusions are drawntogether in the form of five proposals for public policy.     

Asymmetric Information about Collateral Values

I empirically analyze credit market outcomes when competing lenders are differentially informed about the expected return from making a loan. I study the residential mortgage market, where property developers often cooperate with vertically integrated mortgage lenders to offer financing to buyers of new homes. I show that these integrated lenders have superior information about the construction quality of individual homes and exploit this information to lend against higher quality collateral, decreasing foreclosures by up to 40%. To compensate for this adverse selection on collateral quality, nonintegrated lenders charge higher interest rates when competing against a better‐informed integrated lender.     

Auditor choice and information asymmetry: evidence from international syndicated loans

Analyzing a large sample of non-US public firms from 31 countries that obtain private loans, we find that loan syndicates that lend to borrowers that employ Big N auditors are larger and less concentrated and that the lead arrangers and largest investors of these syndicates are able to hold a lower proportion of the loan after issuance. Further analysis demonstrates that this effect exists only in countries with strong creditor rights and in those countries with high levels of societal trust, suggesting that both sound formal and informal institutional factors are prerequisites for lenders and borrowers to benefit from differential audit quality on loan syndicate structure efficiency. Furthermore, we find that the loan syndicate structure benefits for borrowers that employ Big N auditors are higher for borrowers with greater information asymmetry problems, but we do not find that Big N audits are able to address the information asymmetry and moral hazard issues between the lenders themselves.     

Government Debt, Reputation and Creditors' Protections: The Tale of San Giorgio

San Giorgio (1407–1805) was a formal association aimed at protecting creditors’ rights and reducing the risk of debt repudiation by the Republic of Genoa. The behavior of this institution is broadly consistent with debt models that predict lending if lenders can impose big penalties on debtors, and models in which lenders can differentiate between excusable and inexcusable defaults. San Giorgio shareholders enjoyed low credit risk but also lower returns on capital than those prevailing on comparable foreign assets for which creditors’ protection mechanisms were lacking. The Republic’s quid pro quo was a low cost of financing. Differences in credit risk were an important explanation of differences in long-term interest rates across countries in 16th and 17th century Europe, a point not sufficiently emphasized by the literature.     

Foreign Banks and the Dual Effect of Financial Liberalization

In emerging countries, credit market liberalization is often motivated with the financial deepening generated by the entry of foreign financial institutions. However, there is a risk that liberalization may benefit internationally active, export‐oriented businesses at the expense of domestically oriented ones. This paper models a two‐sector economy in which foreign lenders are more efficient than local lenders at extracting value from internationally tradable collateral assets. Under some conditions the entry of foreign lenders eases entrepreneurs’ access to the credit market and raises asset prices and output, but in other circumstances it reduces the depth of the credit market and depresses the price of nontradables and output. Liberalization can have a contractionary impact by inducing a reallocation of credit from the nontradables to the tradables sector.     

Asymmetric Information,Bank Lending,and Implicit Contracts: A Stylized Model of Customer Relationships

Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation.     

Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan

Many governments have perceived the rural moneylender as usurious.This article takes a first step toward directly testing thevalidity of this view. In a study of services, costs, and chargesof fourteen informal market moneylenders and their clients inChambar, Pakistan, the article examines whether the high implicitinterest rates charged reflect the actual costs of operatingin that market. Estimates of the resource costs incurred byinformal lenders for screening, pursuing delinquent loans, overhead,and cost of capital (including unrecoverable loans) suggestthat lenders' charges are equal to their average cost of lendingbut exceed their marginal cost. This finding is consistent withthe view that the informal credit market is characterized byexcess capacity and monopolistic competition in the presenceof imperfect information.     

Credit Reporting, Relationship Banking, and Loan Repayment

How does information sharing between lenders affect borrowers repayment behavior? We show—in a laboratory credit market—that information sharing increases repayment rates, as borrowers anticipate that a good credit record improves their access to credit. This incentive effect of information sharing is substantial when repayment is not third‐party enforceable and lending is dominated by one‐shot transactions. If, however, repeat interaction between borrowers and lenders is feasible, the incentive effect of credit reporting is negligible, as bilateral banking relationships discipline borrowers. Information sharing nevertheless affects market outcome by weakening lenders' ability to extract rents from relationships.     

Collateralization,Bank Loan Rates,and Monitoring

We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique data set from a large bank containing timely assessments of collateral values, we find that the bank responded to a legal reform that exogenously reduced collateral values by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring borrower delinquency on outstanding claims. We thus explain why banks are senior lenders and quantify the value of claimant priority.     

正规金融与非正规金融:机制、效率与实证挑战

正规金融与非正规金融的定位和关系,不仅是重要的学术问题,也是影响间接金融体系改革方向的关键。本文从机制视角建立学理框架,从信息和履约两个基础维度,讨论正规金融与非正规金融的相对效率及决定因素,并通过系统梳理相关文献,指出现有实证研究的成果与挑战;进而结合中国特征,讨论如何提高正规金融与非正规金融的效率,最后提出未来研究方向。本文认为,正规金融与非正规金融因信息和履约机制不同而各有其独立存在价值,其相对效率取决于不同经济发展阶段的社会网络基础和征信、法律体系,现有实证文献对两者作用的分歧主要源于分类、样本局限和内生性处理。本文从机制视角进行分析,体现了正规金融和非正规金融的金融属性,为探索相关领域学术研究和政策制定提供启示。     

Information transfers among co-owned firms

We study how lenders in blockheld firms exploit the information on the other holdings of equity blockholders to learn their attitude toward creditors. In the presence of the conflict of interest between lenders and equityholders, information on how blockholders behave in the other firms they control provides the lenders with key information about potential blockholder behavior. We test this hypothesis using data on US public firms over the 2001–2008 period. We show that the financial conditions of these co-owned firms affect how lenders value other firms in which the owner has a major stake. Bad news on credit quality in co-owned firms raise the firm's credit risk. Our identification is based on the instrumental variables estimation where we instrument the changes in credit risk of co-owned firms by the natural disaster events in the counties of co-owned firm headquarters.     

How changes in market conditions affect screening activity,credit risk,and the lending behaviour of banks

The global financial crisis dramatically transformed the market conditions in the banking industry. We construct a theoretical model of spatial competition that considers the differential information between lenders and loan applicants to explore how changes in the market structure affect the lending behaviour of banks and their incentives to invest in screening and how this, in turn, affects the level of credit risk in the economy. Our findings reveal that enhanced competition reduces lending cost thus encouraging the entry of new customers in credit markets. Also, that the transportation cost that loan applicants are required to pay to reach the bank of their interest shrinks with respect to the degree of competition. We further lend support to the view that stiffer competition has an increasing impact on the level of credit risk. Notably, we find that competition strengthens the incentives of banks to engage in screening activity and that screening serves as a protection mechanism that can provide banks with a shield against bad loans. Overall, when market conditions are substantially distorted, this has a dilutive impact on the incentives mechanism of banks to screen their applicants. We provide empirical evidence which is consistent with the conceptual underpinnings of our theoretical model and the obtained findings.     

The emergence of information sharing in credit markets

We provide the first systematic empirical analysis of how asymmetric information and competition in the credit market affect voluntary information sharing between lenders. We study an experimental credit market in which information sharing can help lenders to distinguish good borrowers from bad ones. Lenders may, however, also lose market power by sharing information with competitors. Our results suggest that asymmetric information in the credit market increases the frequency of information sharing between lenders significantly. Stronger competition between lenders reduces information sharing. In credit markets where lenders may fail to coordinate on sharing information, the degree of information asymmetry, rather than lender competition, drives actual information sharing behavior.     

Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?

Banks can choose to keep loans on balance sheet as private debt or transform them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still retain a portion of their loans in portfolio. Do lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in portfolio? If riskier loans are indeed retained in portfolio, is this motivated by regulatory capital incentives (regulatory capital arbitrage), or a concern for reputation? We examine these questions empirically and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with either the capital arbitrage or reputation explanation for securitization.     

Exclusion,competition, and regulation in the retail loan market

Exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession. The paper analyzes loan-making institutions that set both interest rates and minimum credit requirements. We propose analytical measures of the degree of borrower exclusion from receiving loans. We analyze five market structures: Single lender, regulated interest rate, entry, interest rate discrimination, and highly-competitive lenders. Interest rate regulation improves total welfare relative to a single lender market. However, entry of a second lender reduces exclusion and generates higher total welfare. In the absence of fixed costs, perfect and Bertrand competition are optimal.     

Foreign currency borrowing by small firms in emerging markets: When domestic banks intermediate dollars

This paper investigates what induces small firms in an emerging market economy to borrow dollar credit from domestic banks. Our data are from a unique survey of firms in Lebanon. The findings complement studies of large firms with foreign currency loans from foreign lenders. Exporters, naturally hedged against currency risk, are more likely to incur dollar debt. Firms also partly hedge themselves by passing currency risk to customers and suppliers. Less opaque firms with easily verifiable collateral and higher net worth are more likely to access dollar credit. Firms reliant on formal financing (banks and supplier credit) are more likely to contract dollar debt than firms reliant on informal financing (family, friends and moneylenders). Bank relationships, however, do not increase the dollar debt likelihood. And finally, profitable firms are less likely to have dollar debt. Information frictions and limited collateral, therefore, constrain dollar credit even when it is intermediated domestically.     

Endogenous communication among lenders and entrepreneurial incentives

If banks have an informational monopoly about their clients,borrowers may curtail their effort level for fear of being exploitedvia high interest rates in the future. Banks can correct thisincentive problem by committing to share private informationwith other lenders. The fiercer competition triggered by informationsharing lowers future interest rates and future profits of banks.But, provided banks retain an initial informational advantage,their current profits are raised by the borrowers' higher effort.This trade-off determines the banks' willingness to share information.Their decision affects credit market competition, interest rates,volume of lending, and social welfare.     

南非的非吸收存款类放贷人法律制度

本文回顾了南非非吸收存款类放贷人以及消费信贷行业监管法律制度的演进过程,着重介绍了南非2005年《国家信贷法》、2006年《国家信贷规定》的立法背景和主要内容,指出我国应加快非吸收存款类放贷人的立法规范进程,积极促进信贷市场创新与发展,规范和引导民间借贷市场,形成金融机构+贷款零售商的新型信贷市场格局。     

Financial liberalization,market structure and credit penetration

This paper shows that the effects of financial liberalization on the credit market of a small and capital constrained economy depend on the market structure of domestic banks prior to liberalization. Specifically, under perfect competition in the domestic credit market prior to liberalization, liberalization leads to lower domestic interest rates, in turn leading to increased credit penetration. However, when the initial market structure is one of imperfect competition, liberalization can lead to the exclusion of less wealthy entrepreneurs from the credit market. This provides a rationale for the mixed empirical evidence concerning the effects of liberalization on access to credit in developing markets. Moreover, the analysis provides new insights into the consequences of foreign lenders’ entry into developing economies.     

Risk Assessments and Risk Premiums in the Eurodollar Market

Increasing awareness of the potential risks involved in lending to heavily indebted governments focuses attention on credit pricing in the Eurodollar market. This paper utilizes a recent survey of country-by-country risk assessments as perceived by lenders to show that a systematic relationship exists between these assessments and interest rates in the Euromarket. The relationship is derived from an underlying model described in the paper. The estimated parameters verify a number of hypotheses, providing insights on the loss rates lenders expect to incur in case of default.