Study On The Mechanism Of Mortgage And Guarantee Of Private Lending

How does private lending prevent the risks while facing with the fact that farmers lackcollaterals or the collaterals do not match the requirements of financial institutions? During thetransition of economy and society, the foundations and conditions of private lending have beenchanging, the conventional strong and solid networks based on kinship and region networks aregradually transiting to the weak and unstable networks based on industry and school networks,how does private lending deal with these changes? In view of these, this article holds that anythingthat can take the role of information formation and default punishment can act as collateral,namely guarantee replacement, on the fact that mortgage and guarantee can reduce lending risk,that is, physical assets are not necessary for collaterals, this is consistent with the fact that privatelending generally has high execution rate even without physical mortgages. In summary, effectiveguarantee replacement or recessive guarantee mechanisms exist in private lending itself.Based on the theory of village governance, this article firstly constructed the operatingmodel of private lending with complete information, and then studied the risk preventionmechanisms of private lending with incomplete information by relaxing requirements and scopesof collaterals. Respectively studied the social networks guarantee mechanism in strong ties privatelending and the reputation guarantee mechanism in weak ties private lending, on the basis of thedivision of strong and weak ties, initiative and passive defaults; utilized signalling game model toanalyze the signalling effect of the investment scale to screen out borrower’s passive default,basedon the assumption that the social networks and the reputation can effectively restrain the initiativedefault.The primary conclusions of this article are:1.Anything capable of information formation and default punishment can act as collaterals,namely guarantee replacement, the high execution rate of private lending contract is due to its innereffective mechanism of guarantee replacement;2. There are three implicit guarantee mechanisms in private lending, the social networksmechanism, the reputation mechanism and the signalling mechanism. The social networksmechanism performs the role of collateral in strong ties private lending,the reputation mechanismand the signalling mechanism of borrower’s investment scale perform the role of collateral in weakties private lending; 3. The social network mechanism performs the role of information formation and defaultpunishment through local information, peer selection, peer monitor, multilateral punishment andassociated penalties as well as norms, beliefs, and moral governance mechanisms. The reputationmechanism performs the function of reputation evaluation as well as information formation anddefault punishment via the dynamic game with incomplete information between borrower andlender. The signalling mechanism performs the role of information formation and defaultpunishment through borrower’s investment scale signalling effect;4. This paper studied the three guarantee replacement mechanisms respectively, but that doesnot mean that these three mechanisms are functioning independently, in fact, these three coexistand function simultaneously, merely in different types of Private Lending the dominant guaranteemechanism is different.