Credit rationing by loan size in commercial loan markets

A lender can maximize profits by rationing credit to businesses or by restricting loan size. Credit rationing may be practised even without marked differences among borrowers in terms of default risk or loan administration costs. A theoretical model is used to analyze a commercial loan market characterized by imperfect competition and incomplete information. Analysis shows that the lender can develop a discriminatory interest rate schedule that will segregate borrowers according to their borrowing decisions. The model can also be used to forecast interest rate and loan size patterns consistent with actual patterns in the US commercial loan markets.