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This paper empirically examines the association between bank capital and banks' monitoring effort. We use four proxies to measure the unobservable monitoring effort. Two of the proxies are based on loan quality (ex post outcomes of monitoring effort). The other two proxies are based on salary expense (ex ante proxies intended to capture the quality and quantity of labor input into monitoring effort). Using a bank and time fixed effects estimation, we find a positive association between bank capital and each of our measures of monitoring effort. We find that this association is more pronounced for smaller banks and banks that engage in higher levels of relationship lending. Numerous additional tests and robustness checks, including matched sample analysis and instrumental variable approach to address endogeneity, confirm our main findings. Overall, our evidence is consistent with the prediction in Mehran and Thakor (2011) that banks that keep higher capital monitor more. JEL Classifications: G21; G32; M41.

The authors present empirical evidence that borrowers, consciously or not, leave traces of their intentions, circumstances, and personality traits in the text they write when applying for a loan. This textual information has a substantial and significant ability to predict whether borrowers will pay back the loan above and beyond the financial and demographic variables commonly used in models predicting default. The authors use text-mining and machine learning tools to automatically process and analyze the raw text in over 120,000 loan requests from Prosper, an online crowdfunding platform. Including in the predictive model the textual information in the loan significantly helps predict loan default and can have substantial financial implications. The authors find that loan requests written by defaulting borrowers are more likely to include words related to their family, mentions of God, the borrower’s financial and general hardship, pleading lenders for help, and short-term-focused words. The authors further observe that defaulting loan requests are written in a manner consistent with the writing styles of extroverts and liars.

The federal government makes credit for higher education widely available at subsidized prices through its student loan programs. A loan provision that at times has significantly increased the size and volatility of the subsidies is the consolidation option, which allows borrowers to convert floating rate loans to fixed rate loans, often on very favorable terms. The option provides a novel setting in which to study how unsophisticated borrowers respond to financial incentives. We develop a model to evaluate the option's cost to the government, and find that the ex-ante cost of the option ranged from 0.8% to 6.4% of loan principal between 1998 and 2005. Using a sample of 700,000 student loan records, we find that borrowers responded to the time-varying incentives to consolidate although some left sizeable amounts of money on the table; that more indebted borrowers were more likely to optimize; and that there is some evidence of learning over time.

I provide evidence that loan loss accounting affects procyclical lending through its impact on regulatory actions. Regulators are more likely to place banks with inadequate loan loss allowances under enforcement actions that restrict lending, leading these banks to lend less during downturns. Further, I find that banks with lower regulatory ratings lend less when they have more timely provisions, consistent with research theorizing that timely provisions increase transparency and inhibit regulatory forbearance. This regulatory action mechanism expands on prior research that has focused on the effect of loan loss recognition on regulatory capital adequacy during economic downturns.

We examine the effect of bank culture on financial stability through the lens of bank lending decisions. Using the Competing Value Framework developed in organizational behavior research, we measure bank culture along four distinct dimensions: compete, create, control, and collaborate. We find that compete-dominant banks are associated with riskier lending practices – higher approval rate, lower borrower quality, and fewer covenant requirements. These banks exhibit higher loan growth, but incur larger loan losses. As a result, they make greater contributions to systemic risk. We find the opposite results among control-dominant banks, whose culture emphasizes control and safety. Our findings cannot be explained by the bank business models, CEO compensation incentives and CEO characteristics. To establish causality, we use the exogenous shock to the US banking system during the Russian crisis of Fall 1998.

We analyzed the loan guarantees that the Japanese government provided for banks’ loans to small and medium-sized enterprises (SMEs). We modeled and estimated how much and under what conditions loan guarantees affected banks’ risk-taking and banks’ non -guaranteed lending. In the presence of controls for bank capital and other factors that might affect supplies of bank credit, our estimates supported our model's implications that loan guarantees increased banks’ risk-taking. Consistent with our model, our estimates imply that, when banks initially had fewer guaranteed loans and then got more guaranteed loans, guaranteed loans were complements to, rather than substitutes for, non-guaranteed loans. As complements, loan guarantees could be “high-powered” in that they generated increases not only in guaranteed loans, but also increases in non -guaranteed loans that were a multiple of the increases in guaranteed loans. In addition, banks’ having more capital was associated with doing more non-guaranteed lending.

Purpose This paper aims to examine the relationship between abnormal loan growth and risk in Swedish financial institutions by type and borrower using three indicators as proxies for risks related to loan losses, the ratio of interest income to total loans and solvency perspectives. Design/methodology/approach Using a large sample of different types of Swedish financial institutions, this paper uses a panel framework to examine the relationships between abnormal loan growth rates and loan losses, interest income as a percentage of total loans, changes in the equity to assets ratio and changes in z-score. Findings The findings show two important points of evidence. First, abnormal lending to retail customers increases loan losses and interest income in relation to total loans. Second, abnormal lending to other credit institutions decreases loan losses and significantly changes the capital structure by increasing the reliance on debt funding and significantly improves the z-score measure. Research limitations/implications The findings provide useful implications for the management of loan portfolios for a wide range of Swedish financial institutions, identifying two components: abnormal lending to households may increase loan losses and increase interest income in relation to total loans, and excessive lending to other credit institutions may reduce solvency risk and allow more debt financing for the financial institution. Originality/value This is the first study to use a panel framework in analyzing the behavior of different types of Swedish financial institutions in relation to loans granted to retail customers and other credit institutions.

We study the effects of minimum capital requirements, capital buffers, liquidity regulation and loan loss provisions on the incentives of bankers to exert effort and take excessive risk. These regulations impact differently the behavior of bankers. Capital regulation, liquidity requirements and traditional loan loss provisions for expected losses provide adequate incentives to bankers. Capital requirements are the most powerful instrument. Counter-cyclical (so-called dynamic) loan loss provisions may provide bankers with incentives to gamble. The results help informing the ongoing debate about the harmonization of banking regulation and the implementation of Basel III.

Using within-loan estimations to remove the impact of demand-side factors, we find that the capital levels of banks participating in the same syndicated loan are positively associated with the banks’ contributions to the loan. Consistent with the argument that higher capital reduces the cost of uninsured debt, the positive effect of bank capital on lending is stronger among banks that rely more on wholesale funding. Furthermore, we find that banks increase their contributions to syndicated loans after receiving Troubled Asset Relief Program (TARP) funding. Taken together, we provide new evidence on the importance and causal effect of bank capital on lending.

I examine whether bank regulators and external auditors have conflicting effects on loan loss provision timeliness, an accounting choice associated with important economic consequences and a potential conflict between regulators and auditors. In the absence of the other group, auditors and strict regulators are each positively associated with timeliness. However, audits are negatively associated with timeliness when strict regulators are present, consistent with a conflict for which auditors are the dominating group as audited banks attain a similar level of timeliness regardless of the extent of regulatory scrutiny. Collectively, this suggests that regulators and auditors differentially influence loan loss provisions.

PurposeThis paper aims to derive determinants of loan loss provisions (LLPs) of commercial banks in Malaysia.Design/methodology/approachA single-stage panel data analysis multiple regression model that contains a mixture of quantitative and qualitative elements is used. The LLPs is a dependent variable or regressor, and non-performing loan (NPL), interest income, net profit, loans and advances and gross domestic product (GDP) are the independent variables or regressor/explanatory variables. The moderating variable is “credit risk management” (CRM) and the intervening variable is “relevance and faithful representation”.FindingsThis paper suggests in LLPs, NPLs, interest income, loans and advances, net profit and GDP, as well as the moderating effect of CRM and the intervening effect of relevance and faithful representation, are determinants of the LLPs. The moderating variable CRM strengthens the relationship between the independent variables and the dependent variable. The intervening variable “relevance and faithful representation” brings about a more accurate reporting on the levels of the LLPs.Practical implicationsThe association of the factors is investigated further to detect possible effect of multicollinearity and research to better understand how banks manage their risk as the current investigation is limited to banks in Malaysia.Social implicationsLoan loss provisioning issues of commercial banks in Malaysia are challenges for both regulators and the banking industry owing to the implementation of several new measures, the convergence with internationally accepted accounting standards and differences in loan grading and applications of different loan loss provisioning standards. Because of these challenges, Bank Negara Malaysia (the Central Bank of Malaysia) has tightened its supervision of commercial banks to ensure that banks are sufficiently and adequately provisioned. The banking sector plays a significant role, and it is important that it is resilient in the face of potential sources of systemic risk. And, like in other major ASEAN economies, the Malaysian’s financial system remains largely bank-dominated.Originality/valueThis study discovers whether Malaysian banks are sufficiently provisioned for the regional financial integration under the ASEAN Capital Markets Forum (ACMF) by the end of 2015, where several initiates have been initiated, including the harmonization of standards to encourage greater intra-regional investment flows and transactions and continued provisions of the much needed funds by the region’s private sectors.

Unlike a traditional bank loan with only a single creditor, a syndicated loan involves a group of lenders: a lead arranger and a number of participant lenders. The syndication process, therefore, generates an additional dimension of agency problem between the lead arranger and the participant lenders, in addition to the traditional agency cost of debt between the borrower and the lender (Diamond, 1984; Holmstrom and Tirole, 1997). We investigate the association between CEO entrenchment of the borrowing firm and the loan syndication concentration and composition. Several results are obtained. First, in syndicated loans made to firms with entrenched CEOs, the number of participant lenders and their share in the loan are smaller; the lead arranger retains a larger loan share. Second, these loans are held more closely (in a more concentrated manner). Third, foreign lenders are less involved in these loans; the number of foreign lenders and their shares in the loan are both smaller. Fourth, we find that the results are mainly driven by loans syndicated by non-dominant lead arrangers. Our findings shed light on the two types of agency problems associated with syndicated loans; between lenders and the borrowers and between lead arranger and participant lenders, and have important implications for shareholders, creditors and regulators.

Which characteristics of microfinance institutions affect the choice of a decentralized loan approval process? That is the main question this article attempts to answer. A second concern is whether the choice of allocating the loan approval decision to the loan officer enables a microfinance institution to expand its number of loans and improve its loan portfolio quality after controlling for the endogeneity of the choice of decentralizing the loan approval. To achieve this goal, we study an independently pooled cross-section sample of 362 assessment reports for 267 MFIs from 2001 to 2012 across 67 countries. Results suggest that size, cooperative status, and solidarity lending are MFI-level variables that affect the likelihood of choosing a decentralized loan approval process. Allocating the decision-making authority to the loan officer improves MFIs’ breadth of outreach (the number of active borrowers) but does not affect the size of the loan portfolio and does not deteriorate their loan portfolio quality.

Microentrepreneurs in emerging markets often rely on informal lenders for their routine borrowing needs. This paper investigates informal lenders’ and microentrepreneurs’ incentives to participate in a lender–borrower relationship in a market in which repayments are neither law protected nor asset secured. We consider a borrower who seeks a short-term loan, invests in a project, and repays in full using her project earnings if the project is successful. If the project fails, the borrower uses her outside option to repay over a period of time. The analysis uncovers an interesting effect of the borrower’s outside option on the loan rate offered by the lender—the loan rate first increases and then decreases with the borrower’s outside option. An important policy implication is that an increase in the outside options of the poor microentrepreneurs might actually reduce their surplus. Finally, we find that lenders in emerging markets may be more likely to engage in informal lending compared to those in developed or poorer markets.

Purpose The purpose of this paper is to explore what determines the loan size/demand in a micro-finance group and makes comparative account of self-help groups and joint liability groups. Design/methodology/approach Using primary data and carried out survey (questionnaire and focus group discussion) for data collection. While for econometrics OLS regression has been used. Findings The study finds that employment, landownership and years spent by members in group has positive impact on loan demand by micro finance borrowers. Research limitations/implications This study points out the fact that economic variables along with group characteristics has positive implication on loan demand by borrowers. Practical implications This study would propel further research in group dynamics in micro-finance area. Social implications This study attempts to bring out the fact that economic position of micro-finance members along with its group status has bearing on its loan demand position. Originality/value The authors conducted this study using primary data, and all the collected data and study bring out the fact that older membership in groups are positive for loan demand by borrowers.

This study utilizes Farm Service Agency lending data to verify if previous racial and gender bias allegations still persist in more recent lending decisions. Beyond loan approval decisions, this study focuses on trends in direct loan packaging terms for approved single proprietorship farm borrowers. Results indicate that although no significant disparities were noted in loan amounts and maturities prescribed for various racial and gender minority groups, nonwhite male and female borrowers were usually charged higher interest rates than the others. Loan pricing differentials could have been the lenders' strategy for price management of borrowers' credit risks.

In this paper, we investigate some implications of recent results about salience on loan decisions. Using the framework of focus-weighted utility we show that consumers might take out loans even when that yield them negative utility due to the focusing bias. We suggest, however, that this can be counterbalanced and consumers might be more prudent in their decisions and less likely to take out such loans when the usual fixed-installments plan is coupled with an equivalent decreasing-installments option. Moreover, we show that this is true even for loans with prepayment options or when borrowers take default into consideration. We argue that harmful loan consumption could be decreased if a policy would prescribe presentation of loan repayment schedules in a way that employs this effect.

PurposeThe purpose of this paper is to test whether diversification of credit portfolios across economic sectors leads to improved profitability and reduced credit risks for Ghanaian banks that have been characterized by high non-performing loans in recent times (IMF, 2011).Design/methodology/approachStatic and dynamic estimations, namely Prais-Winsten, fixed and random effect estimators, feasible generalized least squares as well as the system generalized methods of moments are employed on the annual data of 30 Ghanaian banks that operated between 2007 and 2014 to determine the effect of loan portfolio diversification on bank performance.FindingsThe study shows that loan portfolio diversification does not improve banks’ profitability nor does it reduce banks’ credit risks.Research limitations/implicationsThe study focuses on a single banking system in Africa largely as a result of data limitation.Practical implicationsThe study emphasizes the need for banks to perform a careful assessment of the effects of their lending policies geared toward increased sectoral diversification on their monitoring efficiency and effectiveness. A further investment in loan screening and monitoring is necessary to minimize credit risks.Originality/valueThis study is the first to present empirical evidence on the effects of loan portfolio diversification on bank performance in an emerging banking market in Africa.

This paper asks whether the credit market impede innovation. Using a province- and industry-level innovation dataset combined with regional loan structure in Chinese credit market during 1999-2007, we identify two measures to proxy Chinese banking structure, the long-term vs. short-term bank loans and the Big-Four vs. non-Big-Four banks, which affect technological innovation. We show that industries that are more dependent on external finance exhibit disproportionally higher level of innovation in provinces with a larger share of the long-term bank loan market. However, a larger share of the short-term bank loan market appears to discourage innovation in industries with more dependence on external finance. Moreover, the positive effect of the long-term bank loans on innovation is strengthened in provinces with a higher level of market share of the non-Big-Four banks, whereas the negative effect of the short-term bank loans on innovation is mitigated in those provinces. This study provides evidence on the positive effect of the credit market on innovation.

This study shows that initiation of credit default swap (CDS) trading for an entity's debt increases the share of loans retained by loan syndicate lead arrangers and increases loan spread. These findings are consistent with CDS initiation reducing the effectiveness of a lead arranger's stake in the loan to serve as a mechanism to address the adverse selection and moral hazard problems in the loan syndicate. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency, for loans originated by a lead arranger with a strong reputation in this market, and for firms with relatively illiquid CDS markets.

Banks face a dilemma in choosing between maximising profits and facilitating the sustainable use of resources within a carbon-constrained future. This study provides empirical evidence on this dilemma, investigating whether a bank loan announcement for a firm with high carbon risk conveys information to investors about the firm’s carbon risk exposure collected through a bank’s pre-loan screening and ongoing monitoring. We use a sample of 120 bank loan announcements for ASX-listed firms over the period 2009–2015. We measure high (low) carbon risk exposure based on whether firms meet (do not meet) the reporting threshold of the NGER scheme. We document positive and significant excess loan announcement returns for loan renewals for high carbon risk firms, but not for loan initiations. Further, we document a more significant loan announcement return for renewals with favourable term revisions. Finally, we find no evidence that the market differentiates between domestic and foreign lenders. Taken together, our results suggest that investors perceive that banks incorporate carbon risk considerations into their lending decisions. Our results highlight the value of banks as financial intermediaries given the information asymmetry surrounding firms’ carbon risk exposure, and more generally the need to extend modern banking theory to consider issues such as the impact of banks’ CSR reputation on lending decisions.

The purpose of this study is to assess how information sharing offices affect loan price and quantity in the African banking industry. The empirical evidence is based on a panel of 162 banks in 42 countries for the period 2001–2011. From the Generalised Method of Moments, public credit registries decrease loan price. With instrumental Quantile Regressions, two main findings are established. Public credit registries consistently decrease the price of loans whereas private credit bureaus consistently have the opposite effect. Public credit registries increase loan quantity in bottom quintiles (or banks associated with lower loan quantities) while private credit bureaus increase loan quantity in top quintiles (or banks associated with higher loan quantities).

Distributing loan using group lending method is one of the unique features in microfinance, as it utilises peer monitoring and dynamic incentive to lower credit risks in extending collateral-free loan to the poor. However, many microfinance institutions (MFIs) eventually perceive it to be costly and restricting loan growth thereby resorted to individual lending method to enhance profitability. On the other hand, village banking method was developed to boost outreach and to create self-sustaining village microbanks. We thus seek to empirically observe the loan method efficiency relationship and to examine the best loan method regionally; focusing on not-for-profit MFIs that are widely regarded as best microfinance provider. Non-oriented Data Envelopment Analysis with regional meta-frontier approach is used for efficiency assessment of 628 MFIs from 87 countries in 6 regions, followed by Tobit regression. We also investigated factors affecting efficiencies such as borrowings, total donation, cost per borrower (CPB), portfolio at risk (PAR), interest rates, MFI age, regulation status, and legal format. The results support our argument that appropriate performance analysis should best be performed on regional basis separately as we find different results for different region.

During the 1990s and early 2000s, developing nations in all parts of the world experienced financial crisis. Studies have documented, both theoretically and empirically, that authorities’ guarantee that insolvent financial institutions would be “bailed out” increased the incentives of banks, especially large institutions, to take on excessive loan risk. However, little research has been conducted on how the possibility of being “bailed out” impacts banks’ decisions regarding the understatement of loan loss reserves (i.e. the tendency to conceal loan risk). We argue that the Mexican financial crisis of the 1990s represents a rich setting to investigate the link between “bailout assistance” and banks’ accounting for loan loss reserves. The analysis of loan trends for the entire financial system shows that Mexican banks fully reserved non-performing loans not in 1997, when new accounting standards took effect, but rather in 1999–2001, after the largest institutions had been sold to foreign banks and international bailout assistance had been exhausted. Also, the results show that in the period preceding their sale to foreign institutions, “Too Big To Fail” (TBTF) banks used bailout assistance to directly manage their reserves. By contrast smaller banks used non-bailout sources of capital to reserve non-performing consumer loans, and directly swapped non-performing commercial loans for bailout assistance. Thus, while both TBTF and smaller banks utilized bailout assistance, the bailout funds only affected loan loss reserve levels in the case of TBTF banks.

We investigate the ability of small business borrowers to signal to investors their credit worthiness through the use of text descriptions in the peer‐to‐peer lending market. Specifically, we examine the relationship between the loan description written by a borrower and whether or not the project is funded by investors. Using textual analysis, we find that small business loan descriptions can be used to predict the likelihood that the loan will be funded. We also find that an index, created from a textual analysis of the words used in the loan description, can forecast the performance of the loan, specifically whether or not the loan defaults. This index has the strongest impact when we focus on borrowers with low FICO scores, suggesting that for these individuals the description can signal information that standard measures used for lending purposes cannot. Overall, it appears as though investors are making investment decisions based on proper and relevant signals given by the borrowers through the loan description. (JEL D47, D53, D82, D83, G14, G21)

I comprehensively study the effect of bank competition on the cost of bank loans using U.S. bank loan data from 1995 to 2010. The cost of bank loans is analyzed with regard to loan spreads and covenant intensity. I show that loan spreads and covenant intensity are negatively related to bank competition. I also find that non-investment grade and financially constrained firms benefit more from bank competition than investment grade and financially unconstrained firms do. Lenders with low market power are more willing to reduce loan price than lenders with high market power in competitive lending markets. The results suggest that lenders give favorable loan terms to borrowers in competitive loan markets.

This study examines loan loss provisions (LLPs) in Western European banks over the 2004–2015 period. In particular, this study examines the discretionary cyclical component of LLPs and the timeliness of loan loss provisioning. Moreover, this study investigates the cyclicality of impaired loans. Banks are divided into four groups according to bank ownership type. The groups are commercial banks, cooperative banks, private savings banks and publicly owned savings banks. We thus study the implications of bank ownership type on banks’ loan loss accounting. The regression results suggest that, in general, provisions have a component that is unexplained by discretionary factors and that decreases during economic expansions and increases during recessions. However, in cooperative banks, this component is significantly smaller, suggesting that they do not decrease provisions because of, for example, over-optimism. Furthermore, stakeholder banks allocate provisions for the near-future expected losses whereas commercial banks do not. Finally, the impaired loans of savings banks are less sensitive to changes in the business cycle than those of commercial banks and cooperative banks.

Depopulation in provincial areas has recently caused a decline in regional economies in Japan. Japanese regional banks have thus been advancing into areas outside their original operational bases, especially into major cities and urban regions. Since lending to areas outside the original operational base is inherently more uncertain (and increasing), such lending behavior is expected to significantly affect the credit risk of regional banks’ lending portfolios. In this paper, we analyze the extent to which the lending area (the local region, outside the local region or Tokyo) affects the credit risk of regional banks. By using credit data on five regional banks, we develop credit risk estimation models to analyze the effect of the characteristics of lending area. These analyses indicate that the lending area variables affect credit risk; default is less likely to occur outside the local region and in Tokyo; and the loss given default is smaller in the local region than elsewhere.

Financial systems and companies have become the most important reasons in the weakness of world economic system. The formation and development process of the financial structure also constitute the infrastructure of the world economic system. The path of the financial system and development has led to discuss with the financial crisis in 2008-2011. One of the solutions in order to reduce problems caused by the conventional banking system is alternative financing systems. In Turkey, the corporations based on profit share system are named participation banks. These banks which settle on different principles in the risk distribution of the portfolio acquired are analyzed more nowadays. Participation based banks are placed in practically every regulation related to banking terms and get their legal infrastructure more steady in the banking legislation of Turkey. This study is a continuation of a series related to the situation of participation banking in Turkey. On the other hand, the literature and the history of participation banking have been given less attention in this study. Literature information on methods in participation banks has been described in previous work of the series. Two analyzes were conducted in this study. One analysis is interpretive analysis that expresses the situation of applications of participation banking against banking risks. The other is an analysis of the figures of participation banks in Turkey as a continuation of the series. This study is a 2007-2015 part of research series. The study tries to explore the place and the importance of participation based banking with the various sub-headings, especially in Turkey. For this reason, we examine the comparative review 2007-2015 data of participation banks which are composed of Total Assets, Equity Net Profit, Collected Funds and Bank Loan Funds. Then we compare the total figures with deposit banks for the same period in Turkey.

This paper tries to check whether capital requirement policy has significant influence on bank loan growth by using a sample of regional banks in China from 2005–2008. The paper develops a simultaneous equation models to analyze the endogenous relationship between capital changes, loan growth and non-performing loans. The paper finds that during the sample years, capital condition indeed became a strict constraint for the loan growth of these banks This constraint also became more and more strict and significant across the sample years as the implementation of the policy carried on.

We develop a theoretical model of a network of intermediaries whose optimal behavior is jointly determined, leading to heterogeneous financial norms and systemic vulnerabilities. We apply the model to the network of U.S. mortgage intermediaries from 2005 to 2007, using a data set containing all private-label, fixed-rate mortgages, with loan flows defining links. Default risk was closely related to network position, evolving predictably among linked nodes, and loan quality estimated from the model was related to independent quality measures, altogether pointing to the vital importance of network effects in this market. Received April 20, 2016; editorial decision July 11, 2017 by Editor Stijn Van Nieuwerburgh.

The capacity of Ghanaian banks to absorb large but plausible losses resulting from concentration of individual bank loan portfolios in sectors of the Ghanaian economy is investigated. Stress scenarios consist of worsening of banks’ impaired loan charges by one, two and three standard deviations of the industry’s recent distribution of non-performing loans. Findings reveal that the capital adequacy ratios of many banks would have been negatively impacted, some to the point of becoming insolvent. It is argued that, though these would be micro-prudential breaches, they are of such magnitude as to have economy-wide repercussions. Thus, bank loan portfolios are too concentrated.

Purpose: In the recent past Agricultural Finance Corporation has experienced huge non-performing loan portfolio. This has been to the tune of 5 billion comprising of 2500 clients. The purpose of this study was therefore to establish the contributors of non-performing loan to agricultural finance institution. The study sought to determine the effect of initial loan appraisal, the extent to which loanees’ level of financial management skill affect NPL, and effect of credit policies and loan recovery strategies on nonperformance of loans at AFC. Methodology: The study adopted a case study research design. Data was collected by using questionnaires administered by the researcher. The research targeted a single unit AFC. A total of 4 heads of department from credit, debt collection and recovery, Finance and Audit were targeted to respond to the questionnaire. The selection of the 4 heads was based on purposive sampling method. In addition 36 credit officers and 16 branch managers were selected using stratified and random sampling method as respondent to the study. This gave a total of 54 respondents. The data was analyzed using descriptive statistics utilizing SPSS. Results: The research findings showed that there was a significant positive relationship between loan appraisal and ratio of non-performing loan to total advances. This implies that as the process of loan appraisal is improved and done properly, the loan performance also improves similarly. Therefore, if initial loan appraisal is not done properly it will lead to more non-performing loan Unique contribution to theory, practice and policy: The study recommends that AFC top management should create a working relationship with other lending institutions to ensure that farmers do not abuse the well-kept farming financial records to acquire more loans from the other financial institutions whose recovery could create huge NPL on the part of AFC loans advanced to them.

The non-performing loans (NPL) of financial institutions are considered as a significant issue in the context of Nepal for last few decades. The paper aims to identify the impact of macroeconomic variables (GDP, Inflation, and Real Effective Exchange Rate) and bank specific variables (size, change in loan, real lending rate of interest, and share of loan to total assets) on the non-performing loan of the commercial banks in Nepal. The study was conducted mainly with secondary sources. The data were collected for 26 commercial banks covering the period of 2002-2012 with 227 observations. The study found that macroeconomic variables such as the real effective exchange rate have significantly negative impact on non-performing loan. The impact of GDP growth rate was found to be insignificant in this study. One year lagged inflation rate has significant positive impact on non-performing loan. The banks which charge relatively higher real interest rate have higher non-performing loan, which is consistent with the findings of previous studies. The ownership dummy has positive coefficient and significant at one percent level showing that if the bank is government owned the non-performing loan would be higher than that of the private owned banks. As well, more lending in the previous years and current year reduces the non-performing loan since the coefficient of change in loan in current and previous years have negative coefficient and significant at one percent level.Economic Journal of Development Issues Vol. 19 & 20 No. 1-2 (2015) Combined Issue, Page: 22-38

A substantial part of households and micro enterprises, particularly in developing countries including Indonesia, did not have access to formal financial institutions which then lead them to borrow money from illegal loan providers. Using an experimental study, we tested whether predatory loan, an illegal short-term loan with high-interest rate, was preferable or not by comparing with pawnshop loan, bank loan and household’s limited saving when households confront with financial distress. We divided the participants into three groups: lower low, low, and upper low income. We found that predatory loan was preferable especially for the lower low and low-income group. Result also confirmed that even if the predatory loan charge was increased, the lower low- and low-income groups still prefer to ease their financial distress through predatory loans. Moreover, the longer the duration of the predatory loan, the higher its probability to be chosen as a funding source in times of household financial distress. DOI: https://doi.org/10.26905/jkdp.v21i3.1261

Using a sample of syndicated loan facilities granted to US corporate borrowers from 1987 to 2013, we directly gauge the lead banks’ market power, and test its effects on both price and non-price terms in loan contracts. We find that bank market power is positively correlated with loan spreads, and the positive relation holds for both non-relationship loans and relationship loans. In particular, we report that, for relationship loans, lending banks charge lower loan price for borrowing firms with lower switching cost. We further employ a framework accommodating the joint determination of loan contractual terms, and document that the lead banks’ market power is positively correlated with collateral and negatively correlated with loan maturity. In addition, we report a significant and negative relationship between banking power and the number of covenants in loan contracts, and the negative relationship is stronger for relationship loans.

This study examines whether the strength of legal enforcement at the country level plays a role in the value-relevance of accounting quality for loan pricing determination, using an international sample of firms reporting under IFRS. The underlying hypothesis is that stronger vs. weaker enforcement should affect the informativeness of financial statements, due to their increased credibility, and thus results in a stronger influence of accounting quality on loan pricing, in case this information is considered more reliable by potential lenders. Evidence indicates that accounting quality is consequential for the determination of loan spread only in combination with the level of legal enforcement, and this only holds for the countries with stronger legal enforcement. This evidence indicates that financial statement quality information is value-relevant and has a significant impact on the determination of loan pricing only if this information is considered to be credible enough by loan providers in a country, and this is the case when legal enforcement is stronger.

Loan modification is widely discussed as an alternative to foreclosure, but little research has focused on quantifying its effect on loan performance. I quantify this effect early in the housing crisis by exploiting exogenous variation in the incentives to modify securitized nonagency loans. An additional modification reduces loan losses by 35.8% relative to the average loss; this reduction suggests that the marginal benefit of modification likely exceeded the marginal cost. Consistent with the idea that high-income borrowers may be better equipped to withstand bad economic times, I find that modifications are especially beneficial when borrowers have larger loans. Received April 25, 2016; editorial decision March 24, 2017 by Editor Philip Strahan.

Purpose The purpose of this paper is to examine how a firm’s investment behavior relates to its subsequent bank loan contracting. Design/methodology/approach Using a sample of US firms during the period 1992-2011, the authors examine the association between overinvestment (underinvestment) and three characteristics of bank loan contracts: loan spread, collateral requirement, and loan maturity. Findings The authors find that overinvesting firms obtain loans with higher loan spreads. Additional tests show that the effect of overinvestment on loan spreads is generally more pronounced in firms with lower reputation, weaker shareholder rights, and lower institutional ownership. The effect of overinvestment on collateral requirement is mixed, and investment efficiency has no significant relation to loan maturity. Research limitations/implications The results are subject to the following caveats. First, while the study provides empirical evidence that investment efficiency affects bank loan contracting terms, especially the cost of bank loans, the underlying theory is not well-developed. The authors leave it up to future research to provide a theoretical framework to clearly distinguish the cash flow and credit risk effects of past investment behavior from those of existing agency conflicts. Second, due to data limitation, the sample size is small, especially when the authors control for corporate governance measured by G-index and institutional ownership. Practical implications The finding that overinvestment is costly to corporations suggests that managers should consider the potential trade-offs from such investment decisions carefully. The evidence also alerts shareholders and board members to the importance of monitoring management investment decisions. In addition, the authors find that corporate governance moderates the relationship between investment decisions and cost of bank loans, suggesting that it would be beneficial to design effective governance mechanisms to prevent management from empire building and motivate managers to pursue efficient investment strategies. Originality/value First, the findings enhance understanding of the potential economic consequences of overinvestment decisions in the context of a firm’s private debt contracting. The evidence suggests that lenders perceive higher credit risk from overinvestment than from underinvestment, likely because firms squander cash in the current period by investing in (negative net present value) projects that are likely to result in future cash flow problems. Second, the study contributes to the literature on the determinants of bank loans by identifying an observable empirical proxy for uncertainty in future cash flows that increases credit risk.

We analyze the impact of sovereign rating changes on European corporate loan spreads. We demonstrate that sovereign downgrades lead to significant increases in the spread of loans to domestic firms. We find evidence that the negative effects of a sovereign downgrade are widespread across all firms, also unrated, which are the majority of firms in the European syndicated loan market. A relevant part of this impact depends on the reliance of financial regulation on credit ratings (certification effect), which reduces also loan size and leads to additional burdens for investment grade firms. Instead, we do not find evidence of a significant impact generated by an upgrade. Our results hold also controlling for the sovereign risk, crisis periods, lender characteristics, and endogeneity of loan contract terms.

The federal government holds colleges accountable if too many of their students default on loan repayment, but the default measure traditionally used captures only a fraction of students who are struggling to repay their loans. The 2015 College Scorecard dataset introduced a new loan repayment metric, showing that the percentage of students who have not reduced the principal balance of their loans by at least $1 over a given period of time far outstrips the traditional loan default measure. Using a sample of 3,595 colleges, we test the extent to which student demographics, institutional characteristics, and state-level economic factors are associated with repayment rates and default rates. We also examine whether factors associated with loan repayment rates change between one and seven years after students begin repayment. We find that characteristics traditionally associated with economic disadvantage, including being a first-generation college student or a member of an underrepresented minority group, tend to be associated with lower loan repayment rates, as does attendance at for-profit colleges. These factors are just as or more strongly associated with longer-term repayment rates compared to shorter-term repayment rates.

Many students are averse to taking out loans to pay for education—a phenomenon that is commonly discussed but rarely systematically analyzed. This study explores the relationship between student loan aversion and individual financial characteristics. In this analysis, we rely on a unique dataset of survey responses from more than 5,000 high school seniors, community college students who did and did not borrow for higher education, and adults without a college degree. Regression analyses, using a robust set of controls and institutional fixed effects, show that higher financial literacy and higher knowledge of federal student loans are related to lower loan aversion for education. The magnitude of these effects is large, as much as a 30 to 50 percent reduction in loan aversion in some samples. There is also evidence that prior experience with payday lending is related to increased loan aversion for community college students who did not borrow for college.

This study analyzes the benefits of rapid student loan repayment, defined here as borrowers who repaid their cumulative undergraduate loan debt in half the time of the expected repayment cycle (10 years). Drawing from data on borrowers in two nationally representative samples, I first explain the analytic framework employed to identify rapid loan repayers, then examine whether rapid loan repayment is associated with financial benefits in terms of salary, homeownership, and non–poverty level, identifying how rapid loan repayers differ from their non–rapid loan repayer and nonborrower counterparts. Results show salary benefits associated with rapid loan repayment and indicate that among rapid loan repayers, cumulative loan debt generally did not surpass $15,000. These findings suggest that policy-makers may consider the adoption of shorter repayment plans with clear eligibility cutoff amounts as an alternative to the more common 10-year fixed plan.

Using a sample of firms that disclose the realizations of earnings used for determining covenant compliance in loan contracts, we provide direct evidence on the informational properties of earnings used in the performance covenants included in debt contracts. We find that the earnings measure used in performance covenants does not exhibit asymmetric loss timeliness and has significantly greater cash flow predictive ability than GAAP measures of earnings. We suggest that these results reflect the idea that contracting parties design accounting rules for performance covenants to enhance their efficacy as “tripwires.”

This paper examines whether and how the adoption of eXtensible Business Reporting Language (XBRL) reduces information asymmetry in loan contracting. We hypothesize that the adoption of XBRL can enhance information dissemination and mitigate the information asymmetry problem between borrowers and lenders. Using a sample of 554 US bank loan contracts, we find that borrowers who adopt XBRL enjoy more favourable price and non-price terms of bank loan contracts. Additional analyses indicate that the relations among XBRL adoption and bank loan price vary with loan structure. Overall, this research provides evidence that technology advancements such as XBRL reduce cost of bank loans by decreasing information asymmetry between borrowers and lenders.

A vast literature has emphasised that small banks are at a comparative advantage in lending to small businesses. In this paper, we show that, in addition to bank size, loan officers’ authority affects banks’ specialisation in small business lending. By using a unique dataset based on a survey of Italian banks, we find that loan officers’ authority has a key role in explaining bank specialisation in small business lending. In particular, banks that delegate more decision‐making power to their loan officers are more willing to lend to small firms than other banks. We use several proxies for measuring loan officers’ authority: their discretion in loan approval and in setting loan interest rates, the amount of money up to which they are allowed to lend autonomously, their turnover, their compensation schemes and the kind of information (soft vs. hard information) used both for screening and monitoring purposes.

We present the first empirical study of loan searching strategies and loan granting decisions in a context where banks observe whether applicants have unsuccessfully applied for credit to other lenders in the past. Our identification strategy benefits from the use of granular data on loan applications and exploits the fact that evaluating lenders observe only the rejections received by a borrower up to six months before the current application. We document that past rejections diminish the probability of approval and increase the probability that a loan search is interrupted.

This paper examines the long-run relationship between bank profits, loan growth, and monetary policy at different types of profitable banks. U.S. commercial bank data are analyzed from the FDIC's Historical Statistics on Banking from 1966 to 2013. The banks are divided into two groups based on their relative profitability (above or below the average profit rate) to examine their real estate and commercial loan activities. The bank's loan portfolio allocation (i.e., the ratio between real estate and commercial loans) is also examined to see if it has a relationship with monetary policy. The study finds evidence that monetary policy has a slightly larger negative relationship with real estate loans in banks with above average profits than with their less profitable peers. The analysis also finds evidence suggesting that commercial loan growth in low-profit banks may be more sensitive to their loan loss provisions than to monetary policy. The loan portfolio ratio shows a significant negative relationship with monetary policy and a positive relationship with provisions. The analysis reveals a positive coefficient or ‘perverse result’ between some of the commercial loan growth measures and monetary policy that may be explained by portfolio shifting at banks.