Credit card cash‐out as informal financing: Evidence from China

Using a proprietary account-level database from a commercial bank in China, we document that credit card holders can ease their credit constraints through the practice of cash-out based on bogus transactions using credit cards. We find that such behaviour might be beneficial to both cardholders and banks. First, we find that a 1% increase in the cumulative number of credit card cash-out transactions lowers the probability of default by 9.59%. Second, for private businesses, a 1% increase in the number of abnormal cash-out transactions lowers overdue risk by 13.45%. Third, by lowering the overdue risk, the card-issuing bank earns a larger profit. Our results are consistent with the notion that unconventional credit card cash-out can mitigate the extent of capital misallocation in emerging markets.