Recently, in Japan, some banks and non-banks jointly organize the loan companies for individual customers. They seem to have the following purpose. After the babble collapsed, the profitability of the loan for corporations deteriorates. Banks wish to find their way into the loan without collateral for individual customers since it seems more profitable. But banks do not know how to evaluate the default risk of these customers and can not present the appropriate loan interest rate to them. So some banks enter into the alliance with a non-bank and expect to acquire the knowledge necessary to evaluate the default risk of individual customers. On the other hand, non-banks expect that the alliance with a bank establishes the good reputation and they attract the new customers that they could not before.
We examine the incentive of banks that enter into the alliance with a non-bank, that is, whether the bank’s profit is larger when she can distinguish good borrowers from bad ones than when she can not. We assume two types of borrowers who have different repayment probability. If a bank can not distinguish these borrowers, she must decide the terms of loan under incomplete information. As Stiglitz and Weiss (1981) show, in such circumstance the credit rationing occurs as equilibrium even though there is excess demand in the market. We show that such equilibrium can exist under the appropriate values of the parameters and calculate the bank’s profit in that case. We also calculate the profit under the same parameter values when the bank can distinguish two types of borrowers and compare it to that of the credit rationing equilibrium. We find that the latter is larger than the former. This result suggests that banks have incentive to enter into the alliance with a non-bank.
It is insisted that the collateral plays the important role to adjust the demand for loan at the credit rationing equilibrium after Stiglitz and Weiss (1981). But we observe the Japanese consumer loan market and throw light upon the benefit of information production at making the loan contract.
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