Credit Rationing as Another Cause of Financial Crisis: Evidence from Thailand

Abstract

This paper examines the credit market to determine whether slow growth was caused by problems
in credit markets as many scholars have suggested. In particular, the question of how a rise in
interest rates affects behaviors of the banks and the firms, and how and to what extent credit
restriction affects sales and growth were investigated. The model developed in the paper suggests
that when loan terms are not restricted, lenders will statistically discriminate against small firms.
In other words lenders will charge small firms higher interest rates. When loan contract terms are
restricted, lenders might ration credit buy not lending to small firms that have higher risks.
However, when interest rates are high, large firms might self-select out of the loan markets
because they have other alternatives to cope with credit problem. The analysis from Thai data
during the financial crisis reveals that Thailand faced mild credit rationing problems before the
crises. The problem became stronger, but not severe, during the crises. Trade credit-borrowing
ratio and the results from our regression equation suggest that the self-selection problem was
more pronounced during the crises. However, even though problems of credit rationing and
adverse selection did occur, the importance of trade credits and borrowing on sales declined
during the crises.