Is Improving Access to Credit Bad?

One may think so having in mind the current stock market situation. In fact, giving credit to people that cannot repay their loans is normally not a good idea. However, providing information to lenders about the credit worthiness of potential borrowers can be a step in the right direction. That way, lenders can: 1. identify the borrowers that are more likely to repay their loans and 2. avoid bad borrowers, keeping default rates low.

Credit information is one dimension of enabling access to credit included in Doing Business. The Doing Business credit information index measures the existence of a credit bureau or registry and the types of information collected and distributed by those agencies. For instance, Doing Business assesses whether credit information on individuals and firms is distributed, what is minimum loan amount that gets recorded in the database, and whether positive and negative information about the borrowers is made available to lender.

Providing more information to lenders does not necessarily lead to more lending. That is what Hertzberg, Liberti and Paravisini (2008) found. The authors analyze the reform in the Argentine public credit registry of 1998. The registry expanded the database to include borrowers with less than $200,000 in total debt. The authors found that the firms affected by the expansion, that is those with less than $200,000 total debt, obtain fewer lending than before. As consequence of this reform banks became aware of the other loans those borrowers had and were less likely to lend.

Improving access to credit through credit information may prevent lenders from issuing bad loans, after all.