MPP Seminar: Banking on Persistence: The Impacts of a Credit Guarantee on Bank Lending in Indonesia
The School of Economics would like to invite you to a Microeconometrics and Public Policy Working Group seminar by Russell Toth (University of Sydney).
Credit guarantees are a common policy instrument to increase access to credit for targeted firms, such as small and medium enterprises (MSMEs). There are at least two premises to justify a guarantee. First, by lowering the risk on lending, a guarantee can induce banks to lend more to the targeted firms. However, banks may use the guarantee on loans they would have issued without it, so the amount of guaranteed credit may be significantly less than the
additional lending caused by the guarantee. Second, the guarantee can induce persistent improvements in banks’ capacity to overcome lending frictions, causing additional lending even in non-guaranteed credit. We present new evidence on these channels by estimating the impacts of one of the largest credit guarantee schemes in history, on commercial banks: the Indonesian Kredit Usaha Rakyat (KUR), launched in late 2007. We argue that non-KUR banks provide a valid counterfactual for trends in lending in KUR banks, with validation from a test for common pre-trends. First, we show that the KUR generated additionality, resulting in KUR participant banks cumulatively expanding their MSME lending portfolios 320% more than non-participant banks over the period. Furthermore, we demonstrate that the KUR generates minimal crowd out of counterfactual MSME lending. Second, we leverage a KUR program suspension in 2015 to demonstrate that the increased lending was persistent, suggesting that the KUR led banks to build up persistent MSME lending capacity. The results speak to our understanding of the process of credit market deepening in emerging credit markets.