Why do financially unconstrained individuals respond to higher credit limit?
By Shashwat Alok, Sumit Agarwal, Pulak Ghosh, Xiaoyu Zhang
Citation
Alok, Shashwat., Agarwal, Sumit., Ghosh, Pulak., Zhang, Xiaoyu. (2025). Why do financially unconstrained individuals respond to higher credit limit? .
Copyright
2025
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Abstract
Theory suggests that credit access can stimulate consumption by relaxing current liquidity constraints, reducing the need for precautionary savings, or for behavioral reasons. However, teasing out the exact mechanism is empirically challenging because data on credit availability, income, and liquidity constraints are not readily available. This paper uses unique bank-account-level panel data with detailed information on credit card spending, debit card spending, cash withdrawals, savings, term deposits, and income for a representative sample of consumer bank accounts from a leading Indian bank to explain why credit access boosts consumption. We report several novel findings. Our sample has a low credit utilization rate, so people are not liquidity-constrained. However, credit limit increases significantly boost spending. Consumers spend 9 cents on average for every $1 increase in credit limit. Importantly, consumption growth is not financed by borrowing. Rather, the consumption response is increasing in income and liquidity and is higher for individuals with lower labor income uncertainty and consumption uncertainty. Our findings are inconsistent with either currently binding liquidity constraints or precautionary savings motives. Instead, our findings suggest that credit limit hikes serve as cues that trigger consumption for heuristic reasons.

Shashwat Alok is an Associate Professor of Finance at the Indian School of Business (ISB). He joined ISB in 2013 after receiving his PhD in Finance from the Olin Business School, Washington University in St. Louis. He is currently the Research Director at the Digital Identity Research Initiative.

His primary research interests are in the areas of corporate finance. In particular, his research focuses on understanding the impact of the law, government policy, and institutions on firms and individual behaviour, with a greater focus on emerging markets. His recent work seeks to examine the role of alternative data and fintech in expanding financial inclusion, and the impact of climate change on firms and capital allocation.

Professor Alok is the recipient of multiple prestigious grants, and his work has been accepted at leading international conferences such as those hosted by the American Finance Association, the Asian Bureau of Finance and Economic Research, the European Finance Association, and the Financial Intermediation Research Society. His research has been published or accepted in top academic journals such as the Review of Financial Studies, Management Science, and the Journal of Financial and Quantitative Analysis. Prof Alok's research has been cited by the Indian Economic Survey (2018-2019) and the Reserve Bank of India's Household Finance Committee Report (2017). His research has also featured in major Indian media outlets, including the Economic Times and the Times of India.

Before joining the PhD programme, he graduated among the top of his class in Computer Science and Engineering from the Manipal University. He was the recipient of the Hubert C. Moog Scholar for academic excellence while pursuing his PhD at the Washington University in St Louis.

Shashwat Alok
Shashwat Alok