Bank Borrowing Research Articles

Financial Sector Reforms and Inflation-Growth Nexus

In the 1980s, Pakistan's financial reforms reduced central bank borrowing, raising government debt and tax collection needs. In this context, the conventional approach to evaluating the costs and benefits of low inflation proves inadequate. The sacrifice ratio (SR) focuses on demand contraction's impact on economic activity and fails to capture the true costs of inflation by overlooking the supply-side effects of reduced fiscal space. This study re-evaluates the SR, accounting for both the demand contraction channel and the long-term supply side impact of diminished fiscal space. We hypothesize that the cumulative costs outweigh the long-term benefits of price stability. By incorporating fiscal space scenarios into the time-series model for SR estimation; our results indicate an SR approximately double that found in earlier studies. These findings highlight the importance of incorporating fiscal implications into monetary policy decisions to support sustainable economic growth.

Does litigation risk matter for the choice between bank debt and public debt?

We examine the impact of liberal judge ideology, as an exogenous proxy for litigation risk, on firms' choice of debt structure. In line with the substitution of governance mechanisms hypothesis, we find that U.S. firms headquartered in circuits dominated by liberal judges rely less on bank debt financing. We also show that the substitution away from bank borrowing arising from liberal judge ideology leads to a greater reliance on other financing alternatives, such as public debt and equity financing. Additional analyses indicate that the effect of liberal judge ideology is amplified for firms operating in competitive markets, firms facing tighter financial constraints, and firms with more growth opportunities. The governance substitution effect is, however, less pronounced for firms with higher institutional ownership. Overall, our findings suggest that, by exacerbating litigation risk, liberal judge ideology induces firms to trade-off creditor governance stemming from bank debt with governance by litigation, thus decreasing their reliance on bank debt in favor of alternative financing sources with less strict constraints and lower monitoring of managerial behavior.

The effects of bank mergers on listed U.S. borrowers

AbstractWe examine the effects of U.S. bank mergers on listed U.S. borrowers. Target bank borrowers receive lower loan spreads and no change in loan amount post‐merger in comparison to pre‐merger. In contrast, acquiring bank borrowers receive an increase in loan amount and a relatively small decrease in loan spread in the post‐merger period. Analysis shows that these benefits are available only when borrowers have bargaining power through lending relationships with non‐merging banks. We examine how borrower size, merger type, bank size, and borrower relationship intensity affect our results. Overall, our analysis suggests that efficiency gains from bank consolidation outweigh market power effects.

Does Bank Monitoring Reduce Corporate Misreporting? Evidence from Foreign Bank Entry in China

We propose a model of bank monitoring and borrower financial misreporting. Using the staggered liberalization of the banking sector in China as a natural experiment, we find that, consistent with the model’s prediction, entry by more efficient foreign banks reduces corporate misreporting fraud. Fraud reduction is greatest among borrowers of foreign banks, but fraud also drops among borrowers of domestic banks, suggesting a spillover effect. As predicted by the model, fraud reduction is greatest for borrowers with higher levels of fixed assets or lower levels of current assets. Our evidence suggests that improved bank monitoring reduces financial misreporting. This paper was accepted by Tomasz Piskorski, finance. Funding: M. Li acknowledges support from the National Science Foundation of China [Project 71402078] and the Social Science Foundation of Tsinghua University [Project 2013WKZD004]. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2022.02414 .

Current aspects of improving the methodology for assessing the credit capacity of borrowers of commercial banks

Current aspects of improving the methodology for assessing the credit capacity of borrowers of commercial banks

Public procurement and bank lending

This article unveils that government is intertwined with banking through a hitherto underexplored channel—through public procurement. On a comprehensive firm-level dataset that combines public procurement and accounting data, we apply the difference-in-differences method to show that treated firms that secure a public procurement contract can strengthen their bank borrowing terms. Treated firms obtain a greater amount of bank funding and a higher share of long-term funding at lower interest rates compared to the control firms. The impact on bank lending exceeds the positive impact due to higher revenues and suggests a positive non-revenue channel of public procurement.

The Influence of SAK EMKM Socialization, Accounting Understanding and Education Level on the Implementation of SAK EMKM (In MSMEs in Cinambo District, Bandung City)

Definitely there are several roles played by MSMEs in driving economic growth and development throughout the country. With this being the case, financial reporting and funding challenges often plague these firms. These challenges must be resolved to achieve anything. Financial Accounting standars for micro, smalls and mediums-sized entities primary aim is to make accrual-based financial statements simpler and improve bank borrowing. Despite its benefits, Financial Accounting standars for micro, smalls and mediums-sized entities has not been implemented often, especially in Cinambo District, Bandung City. The inadequate training on how to deal with people, failure to understand business language and general lack of knowledge by small scale business operators are some of the reasons why this is happening. Several studies have found that accounting literacy is a significant determinant for the adoption of Financial Accounting standars for micro, smalls and mediums-sized entities. Objectives are set using research methods to address problems. This study uses quantitative research methodologies: descriptive and verification techniques in analyzing factors affecting the application of Simplified Financial Accounting Standards for Micro, Small, and Medium Entities (Financial Accounting standars for micro, smalls and mediums-sized entities) in Cinambo District, Bandung City, Indonesia. The appraisal of regression analysis involves an assessment of dependability, typicality, hetroscedasticity, the F test and finally the t-test. As shown by two Cronbach’s alpha coefficients of 0.740 and 0.901, a reliability assessment demonstrates that there is satisfactory internal consistency for this measurement instrument. The test for normality indicates that it does exist. Heteroscedasticity shows no trend in the distribution of data sets. The high F value (14.811) and low significance (0.000) of the F test show that the regression model is significant. The t test shows that the variables "Socialisation of Financial Accounting standars for micro, smalls and mediums-sized entities" and "Accounting Understanding" are considerably affecting the variable "Application of Financial Accounting standars for micro, smalls and mediums-sized entities," whereas the variable "Education Level" has a less strong one.

Debt relief for households in developing economies

Abstract Households in developing economies have greater access to formal credit today than at any point in history, owing to the global expansion of microfinance and recent innovations in consumer finance, such as digital lending. While this has improved the ability to smooth consumption and invest in productive activities, it has also raised concerns about over-indebtedness. Against this background, this article reviews and extends the literature on debt relief for households in developing countries. We begin by laying out a simple stylized model that illustrates the costs and benefits of debt relief and use the model to guide our review of the evidence on various relief policies, such as debt forbearance, debt forgiveness, and personal bankruptcy. We additionally present survey evidence from a population of microfinance and bank borrowers with recent exposure to debt relief. The results highlight that an important channel through which discretionary debt relief policies, which are common in developing countries, affect credit market outcomes is their impact on borrower expectations. The development of legal bankruptcy institutions that offer a rules-based avenue to discharge unsustainable debts can reduce such distortions and alleviate the credit market inefficiencies that have often accompanied debt relief initiatives in developing economies.

Firms’ Bond Market Access and Impact on Bank Borrowing Costs

AbstractThis paper documents that companies with bond issuance are larger, are more leveraged, and have higher financing needs, but have lower observed syndicated loan spreads. Using endogenous treatment and outcome estimations, we find that companies would potentially face an average of 114 to 185 basis points (bps) higher loan spreads in counterfactual absence of bond market access, significantly larger than observational difference (57 bps) or existing estimates in the literature. This finding underscores the importance of bond markets for corporate financing and overcoming lending constraints or market power of banks, and also casts doubt on valued banking services as the explanation why loans are more costly to bonds. We also find bond issuance as information release a partial explanation only.

The Impact of "One Belt and One Road" Policy on Corporate Financing Constraints

This paper takes the introduction of the "One Belt and One Road" policy as a quasi-natural experiment, based on the data of A-share listed companies in Shanghai and Shenzhen from 2011 to 2016, and uses the Difference Inequality Method to investigate the impact of the "One Belt and One Road" policy on corporate financing constraints and its action path. The benchmark regression results show that the implementation of the "One Belt and One Road" policy significantly reduces the financing constraints of enterprises supported by the policy. After controlling for possible endogeneity problems by using the placebo test, this conclusion still holds. In addition, this paper also conducts grouping tests according to the industry characteristics of enterprises, and the results show that the mitigation effect of the "One Belt and One Road" policy on the financing constraints of enterprises is more significant in the high-tech industry. The analysis of the action mechanism shows that, on the one hand, compared with the enterprises not affected by the policy, the enterprises supported by the policy have more external financing and bank borrowing increments; on the other hand, compared with the enterprises not affected by the policy, the enterprises supported by the policy have lower bank borrowing financing costs and corporate bond financing costs, and more tax benefits. The study shows that the implementation of the "One Belt and One Road" policy mainly reduces corporate financing constraints through two channels: financing sources and operating costs. This finding not only helps to expand the research framework of macroeconomic policy and micro-enterprise behavior, but also has certain enlightenment for the in-depth understanding of the economic effects of the "Belt and Road" policy and the follow-up reform.

Loan officer specialization and credit defaults

This paper shows that industry specialization of loan officers facilitates monitoring synergies and lowers credit default rates of small- and medium-sized enterprises. We exploit a wave of early loan officer retirements as a quasi-natural experiment, in which the resulting borrower reallocations changed the industry specialization levels of the remaining loan officers. In a difference-in-differences analysis excluding all reallocated borrowers, we find that a negative shock to loan officer specialization increases default rates due to an inferior production of default risk information and excessive loan growth. A positive shock to loan officer specialization generates opposite effects. Our results suggest that loan officers can exploit industry specialization and related monitoring synergies to improve lending decisions and thereby contribute to lowering credit default rates in the bank's borrower portfolio.

Debt Financing and Operational Efficiency of Companies listed at Nairobi Stock Exchange, Kenya

Background: As companies evolve, they confront a myriad of challenges, opportunities, and risks, demanding a laser focus on financial strategies. Within this landscape, the intertwined concepts of debt financing and operational efficiency emerge as critical determinants of a firm's performance and longevity. Debt financing sources presents an intricate landscape in which companies make their financial decisions. However, the existing literature often treats debt financing as a homogenous entity, lacking the granularity required to discern how the specific composition of debt, including the reliance on trade credit versus traditional short-term and long-term bank borrowings, might influence operational efficiency. Thus, this study aimed at identifying the effect of debt financing composition on operational efficiency of companies listed in NSE. Methods: The research focused on examining the link between debt financing structures and operational efficiency in 50 firms listed on the Nairobi Securities Exchange (NSE). The study collected panel data ranging between 2015 and 2022. A positivist research philosophy was employed, utilizing quantitative analysis techniques, specifically descriptive statistical analysis and random effects regression model. Findings: The regression results of the random effects model reveal the relationship between debt financing constructs and operational efficiency. The overall R-squared value for the model is 0.176, suggesting that around 17.6% of the variation in operational efficiency can be explained by the debt financing sub-variables. Furthermore, the model’s goodness of fit is assessed through the Wald chi-square test (χ² =72.61, p = 0.000), confirming its statistical significance. The coefficient for the independent variables trade credit, short-term borrowings, and long-term borrowings are (β = 0.331, p = 0.002), (β = 0.642, p = 0.001), and (β = 0.349, p = 0.001), respectively. The p-values are less than 0.05, indicating that the effects of trade credit, short-term borrowings, and long-term borrowings on the operational efficiency of firms listed at the NSE are statistically significant at the 5% level. Conclusion and Implications: The study concludes that debt financing comprising of trade credit, short-term borrowing and long-term borrowing have beneficial effects on operational efficiency. While all three sub-variables of debt financing contribute to enhanced operational efficiency, their application in corporate financing practices varies, with long-term borrowing being a common choice for funding total assets. In light of these findings, company managers should recognize debt financing as a strategic tool for improving operational efficiency. This recognition should be accompanied by a careful and thoughtful approach to utilizing the three components of debt: trade credit, short-term borrowing, and long-term borrowing.

Conditional conservatism and investment efficiency under a state ownership environment: Further evidence from China

Prior studies on developed markets have documented that conditional conservatism is positively associated with investment efficiency. In this study, we investigate whether this association can be shaped by the unique institutional environment—state ownership of firms and banks—in China. First, we examine the association between conditional conservatism and investment efficiency in China’s corporate setting and find that conditional conservatism can reduce (facilitate) investment in listed firm settings in which overinvestment (underinvestment) is most likely, and thereby improve investment efficiency. Further analyses reveal that the effects of conditional conservatism on improving investment efficiency are less pronounced in state-owned enterprises (SOEs) and firms with higher percentages of loans borrowed from state-owned commercial banks. Moreover, we find that these effects are more pronounced in non-SOEs than in SOEs after the implementation of the 2008 stimulus program, which resulted in a large increase in bank borrowing by Chinese firms. Overall, this study provides new evidence on how the effects of conditional conservatism on investment efficiency can be shaped by concentrated state ownership and politically driven lending in China.

Can the tone of central bankers’ speeches discourage potential bank borrowers in the Eurozone?

The discouragement of potential bank borrowers is a credit market outcome, where discouraged firms are those who need bank credit but do not apply for it due to fear of rejection. Discouragement may arise from behavioural factors shaping firms’ perceptions of the probability of being rejected. We examine whether central bank communication, captured by the tone of central bankers’ speeches, affects the observed discouragement likelihood. The results document a robust negative relationship between the tone of central bankers’ speeches and borrowers’ discouragement across Eurozone countries. This result remains intact in the presence of a wide set of firm-specific and macroeconomic control variables and robustness tests.

Big is beautiful: The impact of bank–borrower relationship and sponsor size on credit spreads and underwriting fees in commercial real estate lending

This study uses a granular dataset to examine the impact of relationships between banks and borrowers and sponsor sizes on the credit spread and the associated underwriting fees of commercial real estate loans. This study focuses on commercial real estate banks that keep the loans on their books and do not use commercial mortgage-backed securities to transfer the credit risk to the capital market. Our findings reveal that credit spreads are lower for borrowers with a prior relationship with the bank; however, the impact of repeated lending varies across sponsor sizes. The prior relationship primarily reduces fees for small and medium-sized sponsors, whereas loans with large sponsors experience a stronger beneficial relationship effect in the credit spread.

The Impact of Quantitative Tools of Monetary Policy on the Performance of Deposit Money Banks in Nigeria (1986-2019)

The goal of this study is to provide empirical evidence about the impact of commercial bank Treasury bill subscription, monetary policy rate, liquidity ratio, and cash reserve ratio on the profitability of Nigerian deposit money banks. The ex post facto research design was adopted for this investigation. Ordinary Least Square was utilized for a regression analysis of the data. According to the results, there is a strong correlation between treasury bills subscription and private sector lending. The research found that the cash reserve ratio correlates highly with private sector lending. The research suggests that the Nigerian government implement measures that would assist deposit money institutions in the country to enhance their lending facilities, particularly for the private sector. To make bank borrowing appealing and inexpensive for investors, the monetary authority must also appropriately handle the quantitative instruments of monetary policy.

A conceptual framework on the role of backward integration in sustainable access to malaria intervention commodities in Nigeria

BackgroundOver the last two decades, global stakeholders and the Nigerian government have invested approximately $2 billion in malaria control, reducing parasite prevalence to 23% from 42% to 2010. However, there is a risk that the modest gains will be reversed due to unmet resource gaps. Backward integration is presented in this paper as a viable option for sustainable funding of malaria intervention commodities in Nigeria.MethodsFollowing a critical appraisal of the resource profile and malaria expenditure, a conceptual framework on backward integration as a means of ensuring long-term supply of malaria intervention commodities was developed. The study analysed secondary annual data from the National Malaria Elimination Programme to estimate commodity needs for the period 2018–2020, as well as total resources committed and the financial gap.ResultsThe funds needed to implement national malaria interventions from 2018 to 2020 totaled US$ 1,122,332,318, of which US$ 531,228,984 (47.3%) were funded. The Nigerian government contributed 2.5%, the Global Fund (26.7%), the President’s Malaria Initiative (16.5%), and the UK Department for International Development (6.2%). The funding shortfall was $591,103,335, or 52.7% of the needs. Various funding scenarios were evaluated for their relative merits and limitations, including advocacy for more external funding, bank borrowing, increased domestic resources, and backward integration.ConclusionsThe study concluded that backward integration should be used, based on a government-led public-private partnership that will increase local production of malaria intervention commodities that are accessible and affordable through market-based demand and supply arrangements.

Serving the Underserved: Microcredit as a Pathway to Commercial Banks

Abstract A large-scale microcredit expansion program—together with a credit bureau accessible to all lenders—can enable unbanked borrowers to build a credit history, facilitating their transition to commercial banks. Loan-level data from Rwanda show the program improved access to credit and reduced poverty. A sizable share of first-time borrowers switched to commercial banks, which cream-skim less risky borrowers and grant them larger, cheaper, and longer-maturity loans. Switchers have lower default risk than nonswitchers and are not riskier than other bank borrowers. Switchers also obtain better loan terms from banks compared with first-time bank borrowers without a credit history.

How does credit information sharing affect trade credit? Evidence from China

AbstractThis paper investigates how credit information sharing affects corporate trade credit financing. Utilising the difference‐in‐differences method, we find a significant reduction in trade credit for infra‐marginal bank borrowers following the introduction of the Chinese National Enterprise Credit Information Publicity System (NECIPS). To reveal the mechanisms underlying the reduction in trade credit, we show that the NECIPS alleviates information asymmetry and increases formal finance access. This financing substitution effect is magnified by weak bargaining power in product markets. Our findings complement the literature on the determinants of trade credit and underscore the indispensable role of the public credit registry.

Factors Determining the Loan Default Risk of Individual Borrowers of Banks: An Empirical Study (2021)

Factors Determining the Loan Default Risk of Individual Borrowers of Banks: An Empirical Study (2021)