Show Less

Financial Liberalization and Intervention

A New Analysis of Credit Rationing

Santonu Basu

This book seeks to provide a coherent explanation as to why the policies of financial liberalization and financial intervention have been unable to achieve the goal of improving the access of borrowers to the loan market, irrespective of size. This is one of the prime criteria for achieving efficiency in the operation of the loan market and its failure has resulted in increased uncertainty and financial fragility.
Buy Book in Print
Show Summary Details
You do not have access to this content

Chapter 3: The Theory of Credit Rationing Revisited

A New Analysis of Credit Rationing

Santonu Basu


3.1 INTRODUCTION The issue of credit rationing principally arises when two individuals are prepared to pay the price, and one receives the loan, while the other is either denied the loan altogether or receives less than he or she demanded. The question is, why is this so? In other words, why do two individuals have different degrees of access to the loan market? It is argued in this chapter that bankers operate in the presence of uncertainty, and as a result cannot calculate in advance the precise magnitude of the probability of borrowers returning the loan (i.e. principal plus interest rate). In other words, they cannot calculate the precise magnitude of default risk on an a priori basis. Consequently, bankers employ credit standards as an alternative means to recoup the loan, should the borrower’s project fail. The credit standard (which includes some form of security or collateral) therefore is an attempt to insure banks’ loan capital against uncertain outcomes. When loan applicants do not meet banks’ credit standards, their applications will generally be rejected. In fact, most failed credit applicants are those who do not meet banks’ credit standards. This is because the banker knows that in the event of a borrower’s failure to maintain the repayment rate, it is the bank that has to bear the major cost. Thus these borrowers are not profitable in the bank’s eyes. However, the credit standard that banks set is not determined entirely by bankers’ wish to avoid risk and uncertainty, but rather...

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information

or login to access all content.