A New Analysis of Credit Rationing
This book examines why the policy of financial liberalization and for that matter financial intervention, were unable to improve all borrowers’ access to the loan market. It is argued that the loan market operates in the presence of uncertainty, and as a result, other than the interest rate, there are two additional factors, namely the credit standard and credit risk, that play a crucial role in determining borrowers’ access to the loan market. Lenders introduce the credit standard in order to ensure that should the borrowers’ projects for which they sought loans fail, there remains some alternative means to enable lenders to recoup their loan capital. The issue of credit risk principally arises because, in the competitive atmosphere in which this market operates, lenders are not able, in all circumstances, to secure their loans by the credit standard. The portion of the loan which is not secured by the credit standard is subject to credit risk. It is the variation in the credit standard implemented by the respective lenders which causes the variation in the access of different groups of borrowers to the loan market. Proponents of policies in the past as well as in the present investigated neither why lenders introduce the credit standard nor what causes the variation in the credit standard; instead they under-estimated or overlooked the importance of this issue. As a result both past and present policies either adversely affected the performance of this sector or brought about a crisis. This was at least the...
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