Credit Quality Research Articles

Analyst distance and credit rating consistency

In this paper, we investigate the effect of analyst distance on the assignment of credit ratings and show that issuers with analysts located in more distant offices obtain more conservative ratings than issuers with analysts located closer. Our results are robust to an analyst home bias and suggest that more distant analysts are subject to an informational disadvantage when conducting their rating analysis. Given an asymmetric reputational cost function that penalizes an overestimation of credit quality more heavily than an underestimation, assigning more conservative ratings is a rational response to the higher levels of information uncertainty that a greater distance can entail.

Job polarisation and household borrowing

AbstractThe last few decades have seen transformative changes to the structure of employment, which have led to a deterioration in demand for middle-skill occupations, a process known as job polarisation. As demand for middle-skill workers shrinks, expectations about households’ income through their lifetime horizon must be adjusted. It is possible that these expectations loop back into the credit system and affect the lending behaviour of credit institutions or that they impact households’ self-assessment of their opportunities to borrow money. In this paper we study how the process of job polarisation affects credit demand and supply, studying its relationship with credit constraint and credit quality.

Impact of lease versus buy decisions on government tax revenues: An in‐depth analysis

AbstractNumerous managerial and corporate finance perspectives suggest mutual tax advantages when depreciation is transferred from an asset's user to a lessor, creating a perceived loss of tax revenue for the government. This study delves deeper into the lease versus buy decision and its ramifications on government tax revenue. It goes beyond tax rate discrepancies, exploring how factors like lessor‐lessee borrowing rate differences, asset lifespan, depreciation, and lease payment schedules impact tax revenues, both analytically and numerically. The paper establishes a strong theoretical foundation, emphasizing positive‐sum games involving lessees, lessors, and governments in individual deals. Government benefits from leasing vary across asset classes, market structures, depreciation timelines, credit quality, tax credits, and business cycles. The proposal is that the aggregate impact at the federal level could be positive, negative, or neutral across all leasing deals. These insights surpass conventional knowledge, offering valuable perspectives for finance and accounting educators, students, practitioners, and policymakers.

Economic growth targets and bank risk exposure: Evidence from China

Managing growth targets to maintain economic growth is a common practice worldwide. Using data of local commercial banks over the period 2003 to 2019, we examine the effect of local economic growth targets on the risk exposure of commercial banks in China. We find that local economic growth targets are positively associated with bank risk exposure. This relationship is more pronounced in (1) state-owned banks and those with executives having stronger promotion incentives, (2) provinces with politicians at critical stages for promotion, lower marketization, and lower growth potential, and (3) periods with bleak economic outlook and greater economic policy uncertainty. We further discuss two possible channels through which growth targets affect bank risk: the credit allocation channel and the credit quality channel. Our study sheds new light on the potential costs associated with local governments’ efforts to stabilize economic growth from the perspective of bank risk exposure.

Measuring the Resilience of Rural Banks Against COVID-19 Pandemic: Evidence from West Java, Indonesia

The potential disruption of operational activities in rural banks is linked to MSME actors' inability to repay loans amid the COVID-19 pandemic. The quality of credit and financing provided by these banks is vital in ensuring income and interest continuity, thereby impacting profitability. This study aims to analyze the financial performance dynamics and factors influencing rural banks' profitability in West Java, Indonesia, during COVID-19. The research utilized multiple linear regression with REM estimation. Despite the pandemic's challenges, the ROA, CAR, and equity values of the rural banks met minimum standards, though NPL values exceeded maximum limits. The combined factors of CAR, NPL, equity, net income, and the pandemic collectively influence profitability. Specifically, NPL and the pandemic have significant negative effects, while net income positively impacts profitability. To bolster the resilience of rural banks during crises, suggested policy measures include strengthening capital reserves, tightening credit policies, implementing good governance practices, and enhancing operational cost efficiency.

Computing the impact of central clearing on systemic risk.

The paper uses a graph model to examine the effects of financial market regulations on systemic risk. Focusing on central clearing, we model the financial system as a multigraph of trade and risk relations among banks. We then study the impact of central clearing by a priori estimates in the model, stylized case studies, and a simulation case study. These case studies identify the drivers of regulatory policies on risk reduction at the firm and systemic levels. The analysis shows that the effect of central clearing on systemic risk is ambiguous, with potential positive and negative outcomes, depending on the credit quality of the clearing house, netting benefits and losses, and concentration risks. These computational findings align with empirical studies, yet do not require intensive collection of proprietary data. In addition, our approach enables us to disentangle various competing effects. The approach thus provides policymakers and market practitioners with tools to study the impact of a regulation at each level, enabling decision-makers to anticipate and evaluate the potential impact of regulatory interventions in various scenarios before their implementation.

Corporate social responsibility and credit rating: evidence from French companies

PurposeThis study aims to provide further insights into the connection between corporate social responsibility (CSR) and companies’ credit ratings, while also exploring the role of corporate governance as a moderating factor. The hypotheses for this relationship are rooted in both legitimacy and stakeholder theories.Design/methodology/approachUsing a sample of French non-financial listed firms from 2007 to 2020, this paper uses the ordered probit model introduced by Greene (2000). The issue of endogeneity has also been addressed.FindingsThe study reveals that CSR practices positively impact companies’ credit ratings by enhancing solvency and financial performance. Specifically, firms that prioritize CSR, particularly in the social and environmental dimensions (such as community relations, diversity, employee relations, environmental performance and product characteristics), tend to have higher credit ratings and a reduced risk of default. This suggests that credit rating agencies likely incorporate CSR performance when assigning credit ratings. Furthermore, the quality of corporate governance acts as a moderator, strengthening the relationship between CSR and credit ratings. The findings remain robust even after accounting for key firm attributes and addressing potential endogeneity between CSR and credit ratings.Practical implicationsThis research provides valuable guidance for policymakers, corporate managers, investors and other stakeholders, as it offers insights into the influence of CSR activities on risk premiums and financing costs. For financial institutions, expanding credit decisions to encompass non-financial factors such as CSR can result in more accurate predictions of firm credit quality compared to relying solely on financial indicators.Originality/valueTo the best of the authors’ knowledge, this study stands out as the first to systematically examine the relationship between CSR and credit ratings within the French context. Moreover, it distinguishes itself by investigating the moderating influence of corporate governance on this relationship, setting it apart from prior research.

Kredit Bermasalah dan Likuiditas: Dampak Terhadap Profitabilitas Bank Cabang Jatitujuh Perumda BPR Majalengka

This research aims to determine the development and influence of Problem Loans and Liquidity on Profitability at Perumda BPR Jatitujuh Branch, Majalengka Regency. This research uses descriptive methods and verification research methods with a quantitative approach. The data used in this research is secondary data in the form of financial reports of Perumda BPR Jatitujuh Branch, Majalengka Regency for 2016-2020 which were obtained directly through interviews. The number of samples in this research was 5, namely 5 years of financial reports obtained using purposive sampling techniques. Data analysis in this research uses multiple regression analysis with the help of the IBM SPSS Statistics version 25 application. The research results show that partially non-performing loans have a negative and significant effect on profitability levels and liquidity has a positive and significant effect on profitability. Simultaneously, non-performing loans and liquidity have a positive and significant effect on profitability at Perumda BPR Jatitujuh Branch, Majalengka Regency for the 2016-2020 period. It would be better for Perumda BPR Jatitujuh Branch to pay attention to the criteria for prospective customers and handle problem loans carefully so that the credit being handled runs smoothly and there are no bad debts, as well as paying attention to the quality of credit distributed to avoid problem loans so as to obtain profits or income from credit. which was distributed amidst tightening liquidity ratios.

Credit risk, debt overhang, and the life cycle of callable bonds

Abstract We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets.

A Demand Curve for Disaster Recovery Loans

We estimate and trace a credit demand curve for households that recently experienced damage to their homes from a natural disaster. Our administrative data include over one million applicants to a federal recovery loan program for households. We estimate extensive‐margin demand over a large range of interest rates. Our identification strategy exploits 24 natural experiments, leveraging exogenous, time‐based variation in the program's offered interest rate. Interest rates meaningfully affect consumer demand throughout the distribution of rates. On average, a 1 percentage point increase in the interest rate reduces loan take‐up by 26%. We find a large impact of applicants' credit quality on demand and evidence of monthly payment targeting. Using our estimated demand curve and information on program costs, we find that the program generates an average social surplus of $2900 per borrower.

THE IMPACT OF NON-PERFORMING DEBTS ON BANKING PERFORMANCE: AN ANALYTICAL STUDY OF THE MIDDLE EAST BANK AND THE IRAQI INVESTMENT BANK

Purpose: The research aims to study the practical measurement of non-performing debt risks on banking performance and present the results, which provide valuable financial information to bank users and decision-makers. Theoretical framework: The theoretical framework of this research involves categorizing loans encountered by banks to identify non-performing and written-off loans resulting from credit risks. It also seeks to understand how to address non-performing loans to prevent financial distress that banks might face as a result, thus enhancing the value of accounting information derived from the banking accounting system. Method/design/approach: In this study, banking credit risks are measured using indicators based on the primary financial statements of the Middle East Bank and the Iraqi Investment Bank for the period from 2005 to 2008. Results and conclusion: The study indicated that the importance of financial disclosure is increasing, especially in the context of the banking sector, given the complexity of financial instruments such as derivatives and securities, their significant trading volume, and the associated risks. Research implications: The research results revealed that banks do not disclose the reasons behind financial distress, represented by credit risks and non-performing loans, nor do they disclose the quality of banking credit, loan classifications based on due dates, and how to calculate provisions for doubtful loans. Originality/value: The analysis sheds light on the relationship between non-performing debt risks and banking performance through the process of analyzing banking credit risks. Banking credit risks are among the most significant risks faced by commercial banks, as they arise from the probability of customers not meeting their obligations on their due dates, leading to potential losses for the banks.

Bond yield effects of corporate bond default: Evidence from bond default events of 2014–2022

This paper conducts an event study to examine the impact of bond default events on daily bond yields following rigid payment defaults. Our results demonstrate a significant increase in abnormal returns of corporate bonds subsequent to intra-industry bond defaults. Notably, the extent of this effect varies based on credit quality and bond type. Further analyses reveal that companies of lower credit quality and unlisted are notably more affected by default events. Specifically, we find some evidence that defaults in publicly listed firms, state-owned enterprises, or medium-term notes lead to more pronounced effects on bond yields.

How do macroeconomic variables and financial inclusion affect financial stability in Indonesia?

Financial stability is a crucial indicator of the financial sector's health, reflecting the system's resilience or vulnerability to crises. This study investigates the impact of macroeconomic variables and financial inclusion on financial stability in Indonesia, utilizing quarterly data from the first quarter of 2012 to the fourth quarter of 2021. Employing the Vector Error Correction Model (VECM), the research examines the influences of these factors in both the short and long term. The findings reveal that macroeconomic variables and financial inclusion significantly affect financial stability in Indonesia across both time frames. Specifically, inflation emerges as a critical factor influencing financial stability in the long term, while interest rates play a pivotal role in the short term. Moreover, financial inclusion, represented by the public's use of banking products and third-party funds relative to Gross Domestic Product (GDP), impacts financial stability both in the long and short term. Conversely, financial inclusion, measured by credit to GDP, exhibits only short-term effects on financial stability. The results underscore the importance of careful consideration by the central bank when formulating monetary policy, particularly regarding interest rate adjustments, due to their immediate impact on financial system stability. Over the long term, maintaining control over inflation rates is imperative to safeguard financial stability. Furthermore, financial institutions, in their role of fostering financial inclusion by distributing credit, must balance the quality of credit with its quantity to avoid negative impacts on the financial system's stability. This study contributes valuable insights for policymakers and financial institutions aiming to bolster Indonesia's financial stability through prudent macroeconomic management and the strategic implementation of financial inclusion initiatives.

Role of behind-the-border factors in determining state-level differences in FDI inflows to India

PurposeAlthough India is seen as a key player in the global economy, it is still below its potential level of growth. In this age of globalism, integration with the global economy through trade and foreign investments fosters domestic growth. For India, although this integration has strengthened over the years, there are certain gaps that remain to be addressed. Though numerous studies in the literature have tried to find answers to these questions, an important aspect that has not been considered by these studies relates to India’s federal structure and the role of states in determining the aggregate economic outcome. As Foreign Direct Investment (FDI) inflows to India are concentrated in a few states, this paper aims to provide an assessment of the reasons behind this trend.Design/methodology/approachThis paper aims to investigate the reasons behind the interstate differences with respect to FDI inflows in India. The analytical work undertaken for this paper is based on secondary data, collected and collated from various sources. The approach adopted for this paper includes a heat graph analysis to examine whether there is a clear pattern in terms of the state-specific factors for high FDI states versus the low FDI states. This data analysis is followed by an econometric estimation to gauge the impact of state-specific factors in determining the FDI inflows.FindingsAs per the secondary data–driven heat graph and econometric analysis, factors like industrial output, social sector expenditure, judicial quality, connectivity indicators, labor cost and availability of credit, act as differentiators between high and low FDI-receiving states. It then becomes imperative to bridge the gap between the two sets of states in terms of these specific factors. Implementation and success of policy interventions can only be derived at the state level and therefore needs more decentralized approach.Originality/valueThis paper tries to identify the reasons that are responsible for FDI inflows being concentrated in a few Indian states. This involves a comprehensive analysis of several variables to understand whether there is a clear pattern where high-FDI states are also in a better position with respect to these attributes. This effort to factor in the federal aspect of a macroeconomic indicator like FDI provides new dynamic to this area of work.

Impact of Institutional Environment on Banks’ Non-Performing Loans: Evidence from BRICS Countries

The drivers of non-performing loans (NPL) and the possible effects of the institutional and business environments on the credit risk exposure of banks in the panel of BRICS countries and segregated models are analyzed in this paper. The purpose of the study is to identify the relationship between banking, macroeconomic and institutional factors of non-performing loans of banks at the BRICS level for the period 1996–2020. The panel ARDL approach is used for this purpose. The Panel Granger causality test is applied to verify the hypothesis of the relationship between economic development and NPLs. Panel co-integration tests examine the existence of a long-term link between the same two variables. The results of the study demonstrated that a decrease in the proportion of NPLs results from boosting performance metrics like the Z-score. Because the banking industry has more resources as a result of higher financial development and/or financial intermediation, the amount of NPLs is reduced. Finally, our study demonstrates how important the institutional environment is for raising the quality of bank credit. It was concluded that the low level of NPLs in BRICS countries was largely linked to more effective anti-corruption management, robust regulatory standards, increased application of the rule of law, freedom of speech and accountability.

The Effect of Green Credit on Enterprises’ Green Transformation under Sustainable Development: Evidence from Green Innovation in High-Pollution Enterprises in China

How to help enterprises reduce pollution and transform into environmentally friendly enterprises through financial channels is an important issue that needs to be urgently addressed. This study constructs a quasi-natural experiment based on the implementation of the 2012 Green Credit Guidelines and evaluates the impact of green credit policy on green transformation in high-pollution enterprises from the aspect of green innovation. The research results found the following: (1) After the implementation of green credit policy, the quantity and quality of green innovation in high-pollution enterprises have significantly improved. (2) To avoid the inaccuracy of research conclusions caused by differences in sample characteristics, this study used the PSM-DID model to verify the promoting effect of green credit policy on the green transformation of high-pollution enterprises. (3) Furthermore, this study analyzed the impact of differences in the ownership nature of enterprises and regional financial development levels on the green transformation of high-pollution enterprises under green credit policy. The results show that green credit policy has a stronger impact on the green innovation of state-owned high-pollution enterprises and high-pollution enterprises in underdeveloped financial areas. The findings of this study provide an important reference for the reform of green finance of government departments.

Changing the Dollar Exchange Rate Up and Down and its Impact on the Performance of Iraqi Commercial Banks

The study examines the impact of the dollar exchange rate on Iraqi commercial banks' performance from 2016 to 2020. It uses secondary data from 10 banks, representing 80% of Iraq's total assets. Results show a negative effect of the dollar's rise on banks' profitability, liquidity, credit quality, and operational efficiency. Conversely, a decline in the dollar's price increases banks' profitability, liquidity, credit portfolio quality, and resource efficiency. Recommendations include diversifying revenue sources, increasing coverage ratios, restructuring credit portfolios, and developing information and financial supervision systems.

The role of good corporate governance through investment decision support and its impact on banking performance with efficiency-based credit quality as intermediation

The role of good corporate governance through investment decision support and its impact on banking performance with efficiency-based credit quality as intermediation

Risk management for barter exchange policy under retail industry

Nowadays, barter exchange has become growingly popular in the national and global industries as an alternative to excessive inventory transfers. Many companies exchange their surplus products on barter platforms for products they need without using money. In a traditional supply chain, the retailer holds unsold products that hinder the supply chain's profitability from reaching its maximum level. This paper solves this issue by proposing a stochastic model of two players (single manufacturer, single retailer) with trade-credit (delayed payment) and barter exchange policy under a supply chain management. In this work, to entice the retailer and increase sales, the manufacturer grants a credit payment facility to the retailer on the items ordered for a specified period, and the manufacturer does not charge any interest on the outstanding amount during this credit period. The concept of a credit period raises the possibility of default risk. In this case, some interest is charged. Several investments are made here to diminish setup and ordering costs and improve the product quality of the system. This work focuses on the flexible production to manage the demand uncertainty and the marginal reduction technology to lessen carbon emissions that occur during the production and inventory holding. In contrast, a retailer can exchange unsold items in the barter market for its required products, which is extensively discussed in this study. Finally, the maximum profit is assessed in terms of credit period, investments, quality improvement, and production rate. The result numerically and graphically proves a huge impact of the barter platform for any business industry on overstock transfers, conserving cash, managing unpredictable demand, and reaching the maximum profit. Moreover, the significant finding is observed in the proposed work that the idea of the flexible production, barter exchange policy, and several investments increase the system profit up to 50.55%.

ANALYSIS OF CUSTOMER PROFILE CHARASTERISTIC WITH CREDIT QUALITY USING THE CLUSTERING METHOD FOR RISK MITIGATION AND SMALL MEDIUM ENTERPRISE CREDIT PORTOFOLIO EXPANSION PLANNING

in managing the Small Medium Enterprise credit portfolio. The strategy taken by a bank must be adapted to the general characteristics of the target debtors for business expansion and risk mitigation so that business expansion and risk mitigation efforts can be carried out effectively for certain groups. Based on these problems, the purpose of this research is to identify groups of debtors with similar characteristics based on debtor profile data and their credit quality, and to understand the differences in credit risk and opportunities for business expansion among these groups. The data used is the profile of the distribution of debtors from Bank ABC of 5088 debtors. The analysis technique used is K-Means and KMedoids with the evaluation criteria used are silhouette score, davies-bouldin index and computation time. Completion of the optimal number of groups is done by analyzing the WSS graph using the elbow method. Analysis of business expansion and risk reduction is carried out separately where business expansion analysis is carried out for debtors with a collectibility value of 1 and risk reduction analysis is carried out for debtors who have a collectibility value of 2 – 5. The results show that there are 5 groups in the business expansion analysis and 3 groups in risk mitigation analysis. The high value of the silhouette index and davies-bouldin index makes the grouping results have a strong structure. The KMedoids method is used in this analysis because it has better evaluation criteria than K-Means. Priority is also determined for each group formed so that it can be determined which group has the greatest opportunity to become target expansion and which group has the greatest risk that needs to be mitigated. In general, business sectors such as agriculture and plantations are experiencing a decline in economic activity in 2022, so it needs attention from the bank so that it does not disrupt the credit portfolio. To complement the results of this study, an analysis of external and internal business health needs to be carried out in more depth so that the big picture of credit problems at Bank ABC can be identified.