Has previous loan rejection scarred firms from applying for loans during Covid-19?
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View abstract on PubMed
Summary
This summary is machine-generated.Despite government loan schemes, 72% of previously rejected small businesses in the UK remained hesitant to apply for loans due to borrower scarring. However, the pandemic
Area Of Science
- Economics
- Financial Economics
- Behavioral Economics
Background
- The concept of 'discouraged borrowers' is established, referring to individuals or firms hesitant to seek loans after previous rejections.
- The COVID-19 pandemic created unprecedented economic shocks for small businesses, necessitating government intervention through loan guarantee schemes.
Purpose Of The Study
- To investigate borrower scarring effects on UK small businesses' loan application behavior during the COVID-19 pandemic.
- To assess whether generous COVID-19 loan guarantee schemes mitigated previous loan rejection experiences.
- To examine banks' lending protocols under government-backed schemes with minimal lender exposure.
Main Methods
- Analysis of loan application data for approximately 45,000 UK small businesses from 2018 to 2020.
- Examination of borrower demand and bank lending supply during the COVID-19 crisis.
- Statistical analysis to identify the impact of prior loan rejections on subsequent loan applications.
Main Results
- 72% of previously rejected borrowers exhibited reluctance to apply for new loans, indicating persistent borrower scarring.
- The economic shock of the pandemic diminished the scarring effect, with micro and small businesses showing increased loan demand.
- Scarred borrowers did not disproportionately benefit from government-guaranteed loan schemes; banks continued to assess applications individually.
Conclusions
- Government-backed lending schemes are crucial for supporting small businesses during economic crises.
- While the pandemic increased loan demand, previous rejections continued to deter a significant portion of small businesses.
- Banks maintained risk assessment protocols even with government guarantees, suggesting a nuanced approach to lending during the crisis.
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