Question

Using a simple model of lending under strategic default explain the following stylized facts about credit markets in developing countries – 1) high interest rates, 2) loan rationing, 3) different interest rates charged to different borrowers

Answer 1

Under the credit markets in developing countries :

1) High Interest rates : As the position is in a developing country, where availability of the credits is not extended to everyone, so to have credit, the borrower has to offer / accept higher interest rates. This act of the investment will raise the income of the economy and carry the country towards the development path.

2) Loan rationing : Under the developing country, the availability of the credit is limited and the borrowers are much in quantity, so the loan rationing according to some defined factor like vital requirement, mortgage availability, rate of interest, etc. The rationing of loan or credit should be properly defined and executed, so that it will result in development of the country.

3) Different interest rates charged to different borrowers : The interest rate discrimination among the borrower is done on the basis of a) urgency, b) mortgage requirement, c) nation point of view, d) economy development. All those loan which are desired for the nations and economy development are the cheaper ones and those which requires under urgency and against mortgage are defined under higher rate of interest loans.

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