In Search of the Best Interest Rate for Group Lending: Toward a Win–Win Solution for SMEs and Commercial Banks in China

Abstract

To better help resolve the dilemma of more demand for bank lending and increasing defaulted bank loans, this paper develops a pricing model on SMEs’ group lending practice using a gaming method. The optimization method and the game analysis are used to model the dynamical interest rates of group lending in order to maximize the profits for SMEs and to guarantee basic income for commercial banks. A simulated empirical analysis is used to obtain the optimal lending rate and expected profits, and the results provide support for the proposed model. The result of this study provides valuable insights on designing effective incentives to encourage commercial banks to provide funds to SMEs and to encourage SMEs to pay back the loans to commercial banks, and thus is able to help resolve the funding dilemma between commercial banks and small and medium enterprises in China.

Keywords:

• Funding dilemma
• gaming theory
• group lending
• incentive compatibility
• small and medium enterprises

Additional information

Funding

This study is partially funded by the Major Projects of the National Social Science of China (Grant #: 18ZDA095), the Projects of the National Social Science (Grant #: 19BJY228), the Liaoning Province Economic and Social Development Research Project (Grant#: 2019lslktqn-010), the Fundamental Research Funds for the Central Universities (Grant#: DUT18RW120), and the Liaoning Province Social Science Planning Fund (Grant#: L16BGL012).