Optimal Credit Guarantee Ratio for Asia

Naoyuki Yoshino () and Farhad Taghizadeh-Hesary ()

No 586, ADBI Working Papers from Asian Development Bank Institute

Abstract: Difficulty in accessing finance is one of the critical factors constraining the development of small and medium-sized enterprises (SMEs) in Asia. Owing to their significance to national economies, it is important to find ways to provide SMEs with stable finance. One efficient way to promote SME financing is through credit guarantee schemes, where the government guarantees a portion (ratio) of a loan provided by a bank to an SME. This research provides a theoretical model and an empirical analysis of factors that determine optimal credit guarantee ratio. The ratio should be able to fulfill the government’s goal of minimizing the bank’s nonperforming loans to SMEs, and at the same time fulfill the government policies for supporting SMEs. Our results show that three categories of factors can determine the optimal credit guarantee ratio: (i) government policy, (ii) macroeconomic conditions, and (iii) banking behavior. It is crucial for governments to set the optimal credit guarantee ratio based on macroeconomic conditions and vary it for each bank or each group of banks based on their soundness, in order to avoid moral hazard and ensure the stability of lending to SMEs.

Keywords: small and medium-sized enterprises; SME financing; credit guarantee scheme; government guarantee; nonperforming loan; NPLs; macroeconomics; financial soundness; moral hazard; loans (search for similar items in EconPapers)
JEL-codes: G21 H81 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2016-09-20
New Economics Papers: this item is included in nep-ban, nep-ent and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:adbiwp:0586

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