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The Effects of Lowering the Statutory Maximum Interest Rate on Non-bank Credit Loans

Mee Roo, Kim

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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 creditrating company. The legal maximum rate cut significantly lowers the loan interest rate and default rate of low-credit borrowers (i.e., highcredit- 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.

Issue Date
2022-08
Publisher
Korea Development Institute
DOI
https://doi.org/10.23895/kdijep.2022.44.3.1
Journal Title
KDI Journal of Economic Policy
Start Page
1
End Page
26
ISBN
KDI Journal of Economic Policy, vol. 44, no. 3, pp. 1-26
Language
eng
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