Abstract
The permanent state of the financial crisis has predictably brought to the forefront such traditional problem of banking as problem loans. This research aims to work out an econometric approach to the solution of the problem of loans terms’ rescheduling. For this purpose, we, firstly, treated credit as a bank’s investment project with cashflows’ chart including initial outflow (principal) and following inflows represented by loan payments. Secondly, we combined the schematic representation of loan’s cashflows with NPV formula accustomed to loan’s cashflows and it allowed to create the econometric models for three types of loan: classic, annuity, serial. Thirdly, for the case when borrower breaks a loan’s payment schedule and it leads to the reduction of loan’s NPV and loss of the wealth of bank’s shareholders, respectively, we outlined special compensative models of cashflows where default in payment is interpreted by the lender as an additional forced loan. We suggested modifying the loan terms (interest rate or effective period of the loan agreement) for the rest of payment periods. Fourthly, we laid the special compensative models of forced loans’ cashflows a top corresponded initial cashflows of loans and this has made it possible to get formulas calculating the modified interest rate and the additional number of loans’ payment periods with the aid of backward calculation. As a result, we developed the econometric models of the loan terms’ modifications based on the prolongation of the initial credit period and the increasing of the initial interest rate.
Highlights
1.1 Research questionInvestigating the problem loan management is a continuing concern within modern banking
We suggested modifying the loan terms for the rest of payment periods
For the cases of problem loans where borrower breaks the loan’s payment schedule and it leads to the reduction of the loan’s expected net present value (NPV) we developed calculating formulas for the loan terms’ rescheduling:
Summary
1.1 Research questionInvestigating the problem loan management is a continuing concern within modern banking. There is a growing body of literature that recognizes the importance of this problem related to such aspects as the definition and identification of problem loans, detection of reasons and circumstances that lead to the occurrence of problem loans, problem loans’ management including loans’ portfolio management, mitigation of related risks etcetera. Most of these studies have been conducted and represented by governmental or supranational bodies charged with financial supervision and regulation (World Bank, IMF, EBRD, and Basel Committee). Leading financial corporations and banks joined with this process As a result, it was developed standards, practices and other recommendatory documents related to the management of problem loans at the level of the banking system or bank. Much of these documents are concerned with the necessity to maintain the recommended level of capital adequacy
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