Crony Lending in Thailand Before the Financial Crisis

42 Pages Posted: 13 Mar 2002

See all articles by Yupana Wiwattanakantang

Yupana Wiwattanakantang

National University of Singapore - Department of Finance

Raja Kali

University of Arkansas - Department of Economics

Chutatong Charumilind

Ministry of Finance, Thailand

Date Written: March 2002

Abstract

The allocation of credit by banks on "soft" terms to friends and relatives - often termed cronyism - rather than on the basis of "hard" 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 "crony" ties to banks as "soft-budget constraints" 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 "crony" 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 "cronyism" was by far the main driver of pre-crisis lending patterns.

Keywords: Debt Maturity, Crony Capital, Corporate Governance, Agency Costs, East Asia Financial Crisis, Thailand

JEL Classification: G30, G32

Suggested Citation

Wiwattanakantang, Yupana and Kali, Raja and Charumilind, Chutatong, Crony Lending in Thailand Before the Financial Crisis (March 2002). Available at SSRN: https://ssrn.com/abstract=302936 or http://dx.doi.org/10.2139/ssrn.302936

Yupana Wiwattanakantang (Contact Author)

National University of Singapore - Department of Finance ( email )

Business School
Mochtar Riady Building #7-44, 15 Kent Ridge Dri
Singapore, 117592
Singapore
65-6516-1912 (Phone)

Raja Kali

University of Arkansas - Department of Economics ( email )

Sam M. Walton College of Business
Fayetteville, AR 72701
United States
479-575-6219 (Phone)
479-575-3241 (Fax)

HOME PAGE: http://wcob.uark.edu/rkali/index.html

Chutatong Charumilind

Ministry of Finance, Thailand ( email )

Thailand

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