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Distant lending for regional small businesses using public credit guarantee schemes: Evidence from Japan

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  • Tsuruta, Daisuke
Abstract
In this paper, we investigate the extent to which banks use public credit guaranteed loans for distant small business borrowers. Existing studies argue that when banks offer loans for these borrowers, the information asymmetry between them is often severe. These studies then empirically demonstrate how banks can mitigate this problem. We focus instead on the role of Japan’s public credit guarantee scheme in mitigating these same information problems, an approach unaddressed in the literature. If banks offer 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 offer loans to informationally opaque and distant borrowers. To conduct the econometric analysis, we use semiannual bank-region-level data from Japan, which allows us to control for several unobserved fixed effects. The results reveal that credit guarantee loan size is larger and the default rate higher when banks offer credit guaranteed loans to distant borrowers. These findings suggest that banks successfully mitigate the losses of distant lending using the public credit guarantee scheme, thereby providing a valuable contribution to the small business finance literature.

Suggested Citation

  • Tsuruta, Daisuke, 2023. "Distant lending for regional small businesses using public credit guarantee schemes: Evidence from Japan," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 60-76.
    • Handle: RePEc:eee:ecanpo:v:80:y:2023:i:c:p:60-76
    DOI: 10.1016/j.eap.2023.07.017
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    More about this item

    Keywords

    Distant lending; Public credit guarantees; Small businesses; Bank loans; Bank competition;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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