Crony Lending in Thailand Before the Financial Crisis
Author | : Yupana Wiwattanakantang |
Publisher | : |
Total Pages | : 42 |
Release | : 2002 |
Genre | : |
ISBN | : |
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The allocation of credit by banks on quot;softquot; terms to friends and relatives - often termed cronyism - rather than on the basis of quot;hardquot; market criteria in the years leading up to the Asian financial crisis of 1997-98 has been hypothesized as an important cause of the crisis. These practices had their basis in the implicit guarantees provided by the government to banks, which in turn percolated down to firms having quot;cronyquot; ties to banks as quot;soft-budget constraintsquot; for projects of uncertain quality. Such soft-budget constraints should be reflected in preferential access to long term bank credit for firms with close ties to banks. Using pre-crisis data on borrowing patterns in Thailand we find that firms with quot;cronyquot; ties to banks and politicians had greater access to long-term debt than firms without such ties. Surprisingly, we find that a broad range of standard firm characteristics suggested as important factors by the literature on firm finance played almost no role in explaining the allocation of long term bank credit. It is difficult to avoid the interpretation that quot;cronyismquot; was by far the main driver of pre-crisis lending patterns.