Credit rating and microfinance lending decisions based on loss given default (LGD)

Abstract

This paper proposes a credit rating model that considers the impact of key macroeconomic variables on commercial banks' credit decisions and loss given default (LGD). The findings provide additional insight into the phenomena that under some circumstances a higher credit rating may lead to a higher LGD. The empirical analysis is based on actual bank data from 2,044 farmers in China. The theoretical analysis and empirical verification provides key insights into regulatory and commercial bank credit policy in a developing country setting, while helping to alleviate financing problems of small and micro credit entities.