This report estimates the effect of a cut in the legal maximum interest rate on loan application rate, loan approval rate, default probability, a ratio of borrowers whose interest rate is lowered, changes in consumer surplus, and changes in financial institution profits.

To this end, I conduct the structural model estimation to establish a demand model for financial consumers' loan application and repayment and a profit maximization model for financial institutions. After that, based on the estimation results, I present the results of a counter-factual analysis for each scenario of lowering the legal maximum interest rate and each scenario of raising the funding rate.

In all scenarios where the maximum interest rate is cut by 2%p from the 24% level to the 10% level, the reduction in consumer surplus of borrowers excluded from the market exceeds the increase in consumer surplus of borrowers whose interest rates decrease. Accordingly, further lowering of the legal maximum interest rate from the 24% level causes an average decrease in consumer surplus. On the other hand, the financial institution's profit also decreases in all scenarios. In addition, even when the funding interest rate increases at the fixed legal maximum interest rate level, consumer surplus decreases as the number of borrowers excluded from the market increases.

This means that the current policy support is essential to minimize the side effects of lowering the legal maximum interest rate. Also, the fact that an additional number of borrowers is excluded from the market when the funding rate of financial institutions rises implies the need to introduce a legal maximum interest rate system linked to the market interest rate.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Introduction of the Legal Maximum Interest Rate, Status in Major Countries, and Literature Review
　Section 1 Background and Process of Introducing the Legal Maximum Interest Rate
　Section 2 Status of Legal Maximum Interest Rates in Major Countries
　Section 3 Review of Previous Studies

Chapter 3 Analysis of Basic Data
　Section 1 General Status of Credit Loan Market
　Section 2 Changes in the Credit Loan Market Before and After Reductions in the Legal Maximum Interest Rate

Chapter 4 Empirical Analysis Methods
　Section 1 Abbreviated Analysis
　Section 2 Structural Model Analysis

Chapter 5 Results and Interpretation of Empirical Analysis
　Section 1 Results of Abbreviated Analysis
　Section 2 Results of Structural Model Analysis
　Section 3 Results of Counterfactual Analysis

Chapter 6 Conclusion

References
Appendix
ABSTRACT