Unveiling the adverse selection problem in China's digital lending market: Evidence from CHFS

Zhihao Zhan, Anqi Zhang, Mingxin Zhang and Mingxin Zhang

International Review of Financial Analysis, 2024, vol. 96, issue PA

Abstract: Using data from the China Household Finance Survey (CHFS) 2019, we reveals a substantial adverse selection issue within China's Internet Credit Loan (ICL) market. Empirical evidence indicates that households with higher Debt-to-Income Ratios (DIR) are more inclined to apply for Internet Credit Loans (ICLs), with an average DIR of 76.9 %, constituting 20 % of ICL applications. While Internet Credit Loans (ICLs) provide alternative financing options, their high fixed interest rates undermine the potential cost advantages associated with digital technology. Adverse selection is especially pronounced in the case of operational loans. Our findings underscore the urgency for regulatory intervention to address these issues effectively.

Keywords: Internet credit loan; Adverse selection; Digital finance; CHFS (search for similar items in EconPapers)
JEL-codes: E43 G21 G23 L86 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pa:s1057521924005635

DOI: 10.1016/j.irfa.2024.103631

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