Mandatory Credit Allocation and Government Guarantee

Luis Dumlao
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Luis Dumlao: Department of Economics, Ateneo de Manila University

No 202106, Department of Economics, Ateneo de Manila University, Working Paper Series from Department of Economics, Ateneo de Manila University

Abstract: Mandatory credit allocation is a policy intervention to pressure banks to lend to certain sectors otherwise unfettered finance would not give access to. While some would argue that mandatory credit allocation results in sub optimal allocation of resources, it has been shown that such intervention results in socially desirable outcome. However, mandatory credit allocation should not be the responsibility of banks only, it must be supported with government guarantees. There are three sectors in which mandatory credit allocation is given namely the agriculture sector, the micro, small and medium enterprises or MSME sector, and enterprises involved in innovation. In one, the credit allocation is too big, in another too small, and yet in another difficult to identify. In all of these, the banks are left to shoulder the respective mission without government support. Banks either comply or they pay the penalty.

Keywords: Bank Lending; Credit Rationing; Agricultural Finance (search for similar items in EconPapers)
JEL-codes: G21 Q14 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-12
New Economics Papers: this item is included in nep-cfn and nep-mfd
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