Supply And Demand Of Business Credits And Their Impact On The Dispersion Of Lending Interest Rates
Abstract
Commercial banks (CBs) are the main institutions, financing the Bulgarian firms by a poorly developed financial market. For companies, the cost of credit resources should be lower than the return on the projects to be financed. The shocks in credit supply and demand affect not only the cost of credit but also the dispersion of interest rates on loans. This paper examines the impact of positive and negative shocks to credit supply and demand that would have an impact on the dispersion of interest rates in Bulgaria. The study period is 2010-2024, including three sub-periods: the first before the COVID-19 pandemic, the second during the pandemic, and the third - the recovery period.
The Central bank (CB) , as an issuing monetary authority, can directly and indirectly influence the interest rate through banking and interest rate transmission channels. In Bulgaria, the Central Bank operates under the rules of the Currency Board and its influence is therefore negligible. On the other hand, competition in the banking sector and the macroeconomic outlook also influence fluctuations in lending interest rates.
Initially, the study was conducted using an empirical approach to identify factors influence on credit supply and demand. Coefficients of variation were calculated and econometric methods were applied to examine the impact the changes of supply and demand of credit on the dispersion of interest rates.
The firms need predictability of interest of loans to implement efficient projects, so the dispersion of interest rates should be in a small range.
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