Non-personal Guaranteed Loans, Credit Availability, and Firm Performance (Japanese)

Iichiro Uesugi, Hirofumi Uchida and Hiromichi Iwaki

Discussion Papers (Japanese) from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This paper focuses on a non-personal guaranteed loan program introduced by the Small and Medium Enterprise (SME) Unit of Japan Finance Corporation in FY2004 and examines its impact on borrowers' credit availability and ex-post performance to find the following. First, the number of non-personal guaranteed loans had been low since the introduction of the program, but it increased rapidly around the adoption of the Guideline on Personal Guarantees of Business Owners in February 2014. Second, the creditworthiness among non-personal guaranteed loan users, measured by their internal credit ratings and capital ratio, is significantly higher than that of personal guaranteed loan users. Also, the creditworthiness of non-personal guaranteed users after the adoption of the Guideline is even higher than before. Third, the ex-post performance among non-personal guaranteed loan users is better than that among guaranteed loan users except for the period shortly after the start of the program. Surprisingly, the above results contrast with those that our previous study (Uesugi, Uchida, and Iwaki (2015, in Japanese)) found for users of the non-collateralized loan program. They are actually less creditworthy and perform worse than collateralized loan users, while being less credit constrained. One of the possible reasons for the "success" of non-personal guaranteed loan program is the requirement of a debt covenant contract, which is effective in screening eligible borrowers. It was also an additional change in the program in February 2014 in which creditworthy firms are exempt from additional interest payment for their non-personal guaranteed loans that further improved the creditworthiness of the non-personal guaranteed loan users. The contrasting results for the non-personal guaranteed and non-collateralized loan programs reiterate the importance of careful design of loan programs.

Pages: 36 pages
Date: 2016-03
New Economics Papers: this item is included in nep-ban
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