B2: Credit Markets and Microfinance Consider a development bank that is lending to rural borrowers and wants to just break even. All borrowers require a loan of $100 and the gross cost to the bank of making such a loan is $160. Borrowers have limited liability and no collateral. If able to borrow, a safe type of farmer is capable of generating an output value of $200 for sure. A risky type of farmer, if able to borrow, can invest her loan for an output value of $360 with probability 0.75, or zero with probability 0.25. If denied access to credit, both types can work and earn $20 in the labour market. Assume that half of the farmers are safe and half are risky. All potential answers are rounded to the nearest dollar or percentage point. Questions 36-44 relate to this information. II: Individual lending with Asymmetric Information For questions 38-40, suppose the development bank cannot distinguish between the two types, and cannot implement group lending. Question 38 If the development bank believes that both types of farmer wish to borrow, the interest rate on its loans at which it can expect even on average is given by break 83% 113% 60% 156% Question 39 If the development bank were to charge this interest rate, the expected net income of the safe and risky farmers, respectively, from entering into the loan contract and investing would be given by: 17 and 133 40 and 100 17 and 89. 40 and 150 Question 40 Given your answers above and assuming the borrowers act rationally, what is the lowest interest rate that development bank could in fact charge and still break even on average? 60% 83% 220% 113% B2: Credit Markets and Microfinance Consider a development bank that is lending to rural borrowers and wants to just break even. All borrowers require a loan of $100 and the gross cost to the bank of making such a loan is $160. Borrowers have limited liability and no collateral. If able to borrow, a safe type of farmer is capable of generating an output value of $200 for sure. A risky type of farmer, if able to borrow, can invest her loan for an output value of $360 with probability 0.75, or zero with probability 0.25. If denied access to credit, both types can work and earn $20 in the labour market. Assume that half of the farmers are safe and half are risky. All potential answers are rounded to the nearest dollar or percentage point. Questions 36-44 relate to this information. II: Individual lending with Asymmetric Information For questions 38-40, suppose the development bank cannot distinguish between the two types, and cannot implement group lending. Question 38 If the development bank believes that both types of farmer wish to borrow, the interest rate on its loans at which it can expect even on average is given by break 83% 113% 60% 156% Question 39 If the development bank were to charge this interest rate, the expected net income of the safe and risky farmers, respectively, from entering into the loan contract and investing would be given by: 17 and 133 40 and 100 17 and 89. 40 and 150 Question 40 Given your answers above and assuming the borrowers act rationally, what is the lowest interest rate that development bank could in fact charge and still break even on average? 60% 83% 220% 113%