International Finance Discussion Papers (IFDP)
August 2017
Finance and Inequality: The Distributional Impacts of Bank Credit Rationing
M. Ali Choudhary and Anil Jain
Abstract:
We analyze reductions in bank credit using a natural experiment where unprecedented flooding differentially affected banks that were more exposed to flooded regions in Pakistan. Using a unique dataset that covers the universe of consumer loans in Pakistan and this exogenous shock to bank funding, we find two key results. First, banks disproportionately reduce credit to new and less-educated borrowers, following an increase in their funding costs. Second, the credit reduction is not compensated by relatively more lending by less-affected banks. The empirical evidence suggests that adverse selection is the primary cause for banks disproportionately reducing credit to new borrowers.
Keywords: Credit markets, capital, liquidity, financial stability, inequality, adverse selection, relationships
DOI: https://doi.org/10.17016/IFDP.2017.1211
PDF: Full Paper