Unveiling the Villain: Credit Supply and the Debt Trap

Abstract

Based on unique data containing the loan history and online consumption information of cash loan borrowers, we apply an exogenous credit supply shock to these borrowers and show that increased credit increases individuals' delinquency rates and reliance on cash loans. Higher credit supply increases the likelihood of a loan being overdue over 60 days by 5.7% and decreases platform exit by 33%. This effect on delinquency is significantly less prominent among individuals with greater financial literacy. Second, we demonstrate that credit expansion is positively associated with an increase in subsequent borrower consumption, particularly addictive consumption.

Keywords: Credit supply, Debt trap, Cash loan, Consumer finance, FinTech

JEL Classification: D12, G21, I31