Module: General Practice
Q111: Consider the following assertion and reason regarding "Credit Pricing" for SMEs.
Assertion (A): Banks typically charge a higher interest rate spread (Risk Premium) for SME loans compared to large corporate loans.
Reason (R): SMEs are generally perceived to have higher "Information Asymmetry" and higher historical default rates compared to large, listed corporates.
Reason (R): SMEs are generally perceived to have higher "Information Asymmetry" and higher historical default rates compared to large, listed corporates.
✅ Correct Answer: A
"Information Asymmetry" means the lender has incomplete information about the borrower, which is common in SMEs that lack audited public accounts.
This lack of transparency, combined with higher historical default rates, creates higher risk (Reason). To compensate for this specific risk, banks add a higher Risk Premium to the base rate (Assertion). Therefore, because the bank knows less and fears higher default, it charges a higher price, establishing a direct causal link.
This lack of transparency, combined with higher historical default rates, creates higher risk (Reason). To compensate for this specific risk, banks add a higher Risk Premium to the base rate (Assertion). Therefore, because the bank knows less and fears higher default, it charges a higher price, establishing a direct causal link.