There has been an excess supply of funds in the funds market in recent years. We have gained such an impression from the following indicators: the difference between the bank interest rate and the money market interest rate, the relatively sizeable growth of deposits and loans, and the free reserves of financial institutions. Although the nominal interest rate is low as compared with that of most other countries, the real interest rate is relatively high.
At the present time, individual firms in Taiwan have about twice as much debt as equity. The major source of finance comes in the form of loans from financial institutions. Commercial paper, for short-term financing, and corporate debentures, for long-term financing, are still not widely used.
The level of investment has been decreasing in recent years, however, loans are still increasing. The ratio of loans to investment continues to go up. That means that many loans are not extended directly for investment purposes.
The larger private enterprises have a higher debt/equity ratio than smaller corporations. The author has tried to rank industries according to various criteria such as sales, profitability, the value of assets, and short-term and long-term loans from banks. It is found that short-term loans are inversely related to past profits. Long-term loans vary inversely with sales and positively with the value of assets.
In a funds market where such an excess supply of funds exists, it is not appropriate to fit a fund supply function. In this paper, a fund demand function is generated instead. According to our findings, the real bank interest rate, self-owned funds, the difference between the bank interest rate and the money-market interest rate do not exert a significant influence on the demand for funds. The level of investment and the level of production have a significantly positive influence. The author calculates the relative strength of demand for funds for each industry and concludes that the previous bank loans have not supplied our industries with the funds they need.
