Loss given default or default status: Which is better to determine farmers’ credit ratings?

Abstract

This paper establishes a novel farmers’ credit rating model and explores the difference in credit rating based on loss given default (LGD) and default status, using unique loan data from the CFPA Microfinance Management Co., Ltd in China. The empirical results show that the discrimination ability of the farmers’ credit rating method with LGD as the dependent variable is better than that with default status as the dependent variable. Furthermore, the theoretical analysis and empirical verification of this paper provide valuable supplements to the existing literature and new risk measurement insights for the risk management technicians of financial institutions.