Distant Lending for Regional Small Businesses Using Public Credit Guarantee Schemes: Evidence from Japan

In this paper, we investigate to what extent banks use public credit guaranteed loans for distant small business borrowers. Existing studies argue that when banks provide loans for these borrowers, the information asymmetry between them is severe. These studies then empirically show how banks can mitigate this problem. In this analysis, we focus instead on the role of Japan's public credit guarantee scheme in mitigating these same information problems. If banks provide credit guaranteed loans, they suffer few losses from borrower default because the public credit guarantee corporations (not the small business borrowers) make payments to the banks. Therefore, banks can provide loans to distant borrowers even if the information asymmetry is severe. To conduct our analysis, we use semiannual bank-region level data from Japan, which allows us to control for several unobserved fixed effects. The results show that the credit guarantee loan size is larger if banks provide loans to distant small business borrowers. In addition, the default rate is higher when banks provide credit guaranteed loans to distant borrowers. These results suggest that banks successfully mitigate the losses of distant lending using the public credit guarantee scheme.