BOFIT Seminar - Lucy Chernykh (Clemson University) - Payday loans: Risky lending or risky borrowing?

Payday lenders offer small, uncollateralized, and very short-term consumer loans with three-digit APRs. Even amid high borrowing costs and the reputation of predatory lending practices, the demand for these non-bank credit products is surprisingly strong around the world and raises ongoing debates on how to restrict indebtedness and/or price levels in this controversial subprime market. Although there is now a relatively large body of empirical literature which sheds light on the incentives and outcomes of the payday demand-side (households’) behavior, little is known about the supply-side (lenders’) risk-return trade-offs, financial stability, and the overall business model. The common barrier for such investigation is data availability, as payday lending firms provide either limited or non-publicly available information about the details of their operations and financial statements. In this study, I utilize comprehensive industry-level and firm-level financial data on large Russian microcredit firms to study the details of their payday lending (PDL) activities; capital, credit and funding risks; and operational expenses and profit margins. The results of this study also provide early insights on how the PDL industry adjusts to a series of large-scale regulatory shocks, including price and indebtedness caps and the real world stress-test that is the COVID-19 pandemic. I also document how increasing reliance on fintech and online lending channels affects the payday lenders’ costs, outreach, and financial performance indicators.


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