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

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  • Kim, Meeroo

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.

Suggested Citation

  • Kim, Meeroo, 2022. "The effects of lowering the statutory maximum interest rate on non-bank credit loans," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 44(3), pages 1-26.
    • Handle: RePEc:zbw:kdijep:265115
    DOI: 10.23895/kdijep.2022.44.3.1
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    More about this item

    Keywords

    Statutory Maximum Interest Rate; Household Loan; Market Exclusion; Non-banking Sector;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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