FINANCIAL SECTOR REFORMS
381
loans at interest rates of
r
* would now find that their projects are profitable at
lower rates of interest. Loan rate ceilings also deter financial institutions from
taking any voluntary risk as risk premia cannot be charged when ceilings are
binding and operative.
Interest rate ceilings interfere with the functioning of the economy. As low
interest rates produce a bias against future consumption they reduce saving
below what is possible. Then again, as borrowers are able to obtain the funds
they require at low-loan rates, they would be induced to choose relatively
capital-intensive projects. Finally, ...
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