The effects of lowering the statutory maximum interest rate on non-bank credit loans

Meeroo Kim

KDI Journal of Economic Policy, 2022, vol. 44, issue 3, 1-26

Abstract: This paper analyzes the effects of the cut in the legal maximum interest rate (from 27.4% to 24%) that occurred in February of 2018 on loan interest rates, the default rates, and the loan approval rate of borrowers in the non-banking sector. We use the difference-in-difference identification strategy to estimate the effect of the cut in the legal maximum interest rate using micro-level data from a major credit-rating company. The legal maximum rate cut significantly lowers the loan interest rate and default rate of low-credit borrowers (i.e., high-credit-risk borrowers) in the non-banking sector. However, this effect is limited to borrowers who have not been excluded from the market despite the legal maximum interest rate cut. The loan approval rate of low-credit borrowers decreased significantly after the legal maximum interest rate cut. Meanwhile, the loan approval rate of high-credit and medium-credit (i.e., low credit risk and medium credit risk) borrowers increased. This implies that financial institutions in the non-banking sector should reduce the loan supply to low-credit borrowers who are no longer profitable while increasing the loan supply to high- and medium-credit borrowers.

Keywords: Statutory Maximum Interest Rate; Household Loan; Market Exclusion; Non-banking Sector (search for similar items in EconPapers)
JEL-codes: G23 G28 G51 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kdijep:265115

DOI: 10.23895/kdijep.2022.44.3.1

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