Does Informal Finance Help Formal Finance? Evidence from Third Party Loan Guarantees in China *

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Does Informal Finance Help Formal Finance? Evidence from Third Party Loan Guarantees in China *

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by Phil Dybvig , Susan Chenyu Shan , Yongjun Tang , Maggie Chen , Frank M Song , Wing Suen , Xianmin Zhou , Tse-Chun Lin , Rujing Meng , Chun Xia , Huiyan Qiu , Liu Zheng , Qianqian Du , Jun Yang , Chenying Zhang , Chen Lin , Yue Ma , Xueping Wu , Srikant Marakani , David Ng , Ehud Ronn , Yi Wu , Jingting Xu , Thorsten Beck

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@MISC{Dybvig_doesinformal,
    author = {Phil Dybvig and Susan Chenyu Shan and Yongjun Tang and Maggie Chen and Frank M Song and Wing Suen and Xianmin Zhou and Tse-Chun Lin and Rujing Meng and Chun Xia and Huiyan Qiu and Liu Zheng and Qianqian Du and Jun Yang and Chenying Zhang and Chen Lin and Yue Ma and Xueping Wu and Srikant Marakani and David Ng and Ehud Ronn and Yi Wu and Jingting Xu and Thorsten Beck},
    title = {Does Informal Finance Help Formal Finance? Evidence from Third Party Loan Guarantees in China *},
    year = {}
}

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Abstract

ABSTRACT Building on the important studies on corporate financing in China by Allen, Qian and Qian (2005) and Ayyagari, Demirgüc-Kunt and Maksimovic (2010), we examine the role of third-party loan guarantees in facilitating bank lending to SMEs. Using a proprietary database of loan guarantees, we find strong evidence that guarantors and banks disagree on loan credit risk. Loan rates are informative about default but guarantee fee has no predictive power. Given that the guarantor collects soft information in addition to the hard information used by banks, the lack of performance by the guarantor appears puzzling. This result is consistent with the "lazy lender" model as the guarantor takes collateral and overestimates borrower credit quality. Guarantor's main role is to facilitate regulatory arbitrage to circumvent the loan rate cap imposed by the regulators.

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