Individual Loans Research Articles

Does social capital positively influence loan performance even during a crisis?

Theoretically, it is unclear whether group loans outperform individual loans in terms of delinquency, especially during a crisis. It is difficult to test the hypothesis due to differences in the types of borrowers of the group and individual loans and likely differences in their behavior between crises and normal times. We overcome the challenge by comparing simultaneous group and individual loans of the same individual before and during the Covid-19 crisis in India. We find that the delinquency rate of group loans is significantly lower. Further tests suggestively indicate that the outperformance is due to the “peer pressure” channel.

Loan-Level Disclosure and the Convenience Yield of Asset-Backed Securities

ABSTRACT We examine the impact of transparency on the convenience yield of AAA-rated asset-backed security (ABS) tranches. AAA tranches of ABS are commonly held by investors to manage financial liquidity and therefore enjoy a price premium beyond what is determined solely by the expected monetary payoff (i.e., convenience yield). The Securities and Exchange Commission (SEC) requires ABS issuers to provide monthly disclosures about the performance of the underlying individual loans for ABS issued after November 23, 2016 to improve transparency. We document that AAA tranches of ABS experience a significant increase in price volatility after the loan-level disclosure mandate. As a result, the use of these tranches as collateral for short-term funding and their convenience yield decrease significantly after the increased disclosure. Our collective evidence highlights an important unintended consequence of increased transparency in the ABS market; it diminishes the pledgeability of long-term safe assets. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; G23; M48.

The Factors of Determining Repayment Performance in Individual Loan for Small Medium Enterprises in Indonesiathis study aims to determine the affecting factors of repayment performance in Small Medium Enterprises (SMEs) in Indonesia for individual loan pr

The Factors of Determining Repayment Performance in Individual Loan for Small Medium Enterprises in Indonesiathis study aims to determine the affecting factors of repayment performance in Small Medium Enterprises (SMEs) in Indonesia for individual loan pr

Macro and micro of external finance premium and monetary policy transmission

We establish basic facts about the external finance premium. Tens of millions of individual loan contracts extended to euro area firms allow studying the determinants of the external finance premium at the country, bank, firm, and contract levels of disaggregation. At the country level, the variance in the premium is closely linked to sovereign spreads, which are important in understanding financial amplification mechanisms. However, country level differences only explain half of the total variance. The rest is predominantly attributed to variances at the bank and firm levels, which are influenced by the respective balance sheet characteristics. Studying the response of the external finance premium to monetary policy, we find that balance sheet vulnerabilities of banks and firms strengthen the transmission of policy measures to financing conditions. Moreover, our findings reveal an asymmetrical effect contingent on the sign and type of the policies. Specifically, policy rate hikes and quantitative easing measures exert a more pronounced impact on lending spreads, further magnified through their repercussions on the external finance premium.

Macroeconomic environment and the future performance of loans: Evidence from three peer-to-peer platforms

The literature on peer-to-peer loan market performance focuses predominantly on the microlevel variables connected to individual borrower or loan characteristics. We hypothesize that the economic environment, reflected by macroeconomic variables at the time of loan origination, should play a role in explaining loans’ future performance. Our dataset comprises two US-based platforms and one UK-based platform, which provides a rich field to verify our hypothesis with numerous loan-related variables. Specifically, we consider Lending Club with 1,169,976 individual loans and 128 variables, Prosper with 386,685 loans and 142 variables, and Zopa with 440,493 loans and 192 variables. Using linear and threshold regressions, we observe three main findings: (i) accounting for the macroeconomic environment systematically improves our understanding of the variation in the future performance of individual loans; (ii) demand-side variables, particularly the unemployment rate and industrial production, have stronger effects as supply-side and economic uncertainty variables; and (iii) the importance (effect size) of the macroeconomic environment is at least at the level of that of calendar and geographic variables but much smaller than the importance of loan or borrower characteristics. These results suggest that the economic environment might be useful in individual loan-level credit risk models.

Informationally advantaged lenders and the credit derivative market: Evidence from Loan only Credit Default Swap (LCDX)

This paper explores the informational role of the Loan Only Credit Default Index (LCDX) on the pricing of syndicated loans. Despite an extensive body of research on credit indices and loan pricing, limited studies have comprehensively assessed the complex relationship between the LCDX and individual loan spreads. Contrary to indices like the CDX, which are largely linked to corporate bonds, the LCDX directly pertains to the syndicated secured loan market, offering valuable insights about the overall credit default market and the cost of credit risk insurance. Preliminary results reveal a pronounced positive correlation between the LCDX spread and the syndicated loan spread, particularly noticeable amongst borrowers with lower credit quality. The paper highlights the LCDX's pivotal role in conveying secondary credit market information, with critical implications for credit risk management and financial regulations.

Credit Lending Models and Loan Performance of Deposit-Taking Savings and Credit Cooperative Societies in Kenya

The study sought to determine the effect of credit lending models on loan performance of deposit-taking savings and credit cooperative societies in Kenya. Specifically, the study focused on group lending model, individual lending model, digital credit model and cooperative lending model on loan performance of deposit-taking savings and credit cooperative societies in Kenya. The study adopted a descriptive cross-sectional design. The targeted population was all DT-SACCOs as per their registration with SACCO Societies Regulatory Authority. The study population was 176. The study found out that group lending models, individual lending models, digital credit lending and cooperative lending were adopted by the DT-SACCOs to a moderate extent. The study established that the size of the DT-SACCOs and the lending models used accounted for 97.9% of changes in loan performance. The consequence is that other factors not considered in the model were responsible for only 2.1% of variances in loan performance. Further, credit lending models had a significant effect on the loan performance of DT-SACCOs in Kenya. This implied that effective implementation of the credit lending models led to improved loan performance of DT-SACCOs. The study concluded that credit lending models significantly affect the loan performance of DT-SACCOs in Kenya. Further, the DT-SACCOs adopted, on an average basis, the credit lending models. Lastly, individual lending models and total assets significantly affected loan performance. Group lending models, digital lending models, and cooperative lending models, however, do not have a significant effect on loan performance. The study recommended that the managers of the DT-SACCOs should establish mechanisms for improving individual loan processing and the development of competitive individual loan products.

The Impact of Microfinance on Women Borrowers’ Livelihoods: A Case Study of BRAC Kabarole District, Western Uganda

This study examined the experiences of poor women borrowers involved in BRAC microfinance initiatives in Kabarole District. Drawing upon empowerment theory, a cross-sectional study design was employed, with data collection conducted through interviews, observation and key informant interviews. Information was obtained from women borrowers who were selected through convenient sampling whereas interview guides were used to obtain key information from four group leaders and BRAC officials who were purposively selected. The study discovered that although, BRAC loans largely benefited women borrowers with multiple income sources, the expansion of accessibility to loans for women in far flung districts like Kabarole is economically empowering to women borrowers and increases women’s economic agency and productivity by providing highly needed capita for expansion. Access to BRAC credit facility has also improved women’s array of choices, improved their participation in decision-making, expanded their businesses and increased their appetite for individual loans which were previously seen as a masculine attribute. However, several challenges impeded the successful utilization of BRAC microfinance services by women. These included negative group dynamics, short repayment periods, and increased workloads for women, which reduced productivity. Additionally, some women misallocated their loans to address household needs, such as children's school fees and house renovations. In light of these findings, it is recommended that BRAC bank evaluates these challenges and develops mitigation strategies to fully empower women.

Bank Lending Channel Effectiveness – Potential Lessons For Monetary Policy

The article supplements the research on the effectiveness of monetary policy transmission – especially through the bank lending channel. The current study focuses on assessing the transmission of monetary impulses through commercial and cooperative banks as well as through individual loan portfolios, while distinguishing between the fact that they were granted by commercial and cooperative banks. How a change in the central bank’s interest rates may determine a change in the volume of loans in the economy remains the core question of the research.

Adverse Selection and Climate Risk: A Response to

Abstract We identify two issues in the work of Ouazad and Kahn (2022). Correcting either reverses the original result. The two changes are to use the correct FHFA conforming loan limits for each county and year and to compare the individual loan amount to that limit correctly. There is no evidence that lenders transfer climate risk by altering loan origination and securitization behavior. None of our results calls into question the value and importance of the O&K model as a test for adverse selection. The question addressed and the setup of the test are important and should be replicated over time.

Risks In Provision Of Collateral Free Individual Loans: A Case Study Of Bank Rakyat Indonesia

Collateral Free Loans is a bank loan product offered by banks as lenders with the advantage that customers as prospective borrowers are not asked to provide collateral or guarantees in the form of any assets as a condition for being able to borrow money. The advantage of this loan is that someone can apply for credit without guaranteeing their goods. However, the absence of collateral in granting credit sometimes creates problems for the parties, especially the bank as the lender. This study aims to answer the question of how the risk is in providing individual loan without collateral carried out by Bank BRI, and how the application of the prudential principle in managing the risk of individual loans without collateral at Bank Rakyat Indonesia (BRI). This is a qualitative research with a case study approach. Data collection is done by interviews, observation and documentation. The results of this study indicate that the risks faced by banks in efforts to provide individual loan without collateral are 3 factors. The first is non-compliance with the standard requirements for granting credit which includes data collection, data analysis and preparation of conclusions and recommendations. Second, the authenticity of important documents that must also be attached is sometimes doubted. Third, the occurrence of irregularities in paying debts by the payer/treasurer. To minimize the risk of lending, BRI applies the prudential principles in accordance with banking laws through credit analysis which consists of 5 (five) principles, namely character, capital, capacity, condition, and collateral, with an emphasis on 2 aspects, namely character and capacity. These two principles are in line with the fiduciary principle and prudential principle in banking law.

The impact of open banking on traditional lending in the BRICS

This study examines the influence of open banking regulation on traditional bank loans in the emerging markets of the BRICS—Brazil, Russia, India, China, and South Africa. Utilizing bank-level and individual-level data, the paper reveals that the introduction of open banking significantly diminishes consumer loan lending by traditional banks. Additionally, consumer propensity to acquire loans from traditional banks decreases. The research provides empirical evidence of how open banking impacts both the supply and demand sides of individual loans from traditional banks. This paper contributes to the literature by highlighting the unique role of open banking in promoting financial inclusion in emerging economies.

The influence of external governance mechanisms on the performance of microfinance institutions in Togo

PurposeThis paper aims to assess the effects of external governance mechanisms on the performance of microfinance institutions (MFIs) in Togo.Design/methodology/approachUsing annual time series data from a sample of 30 MFIs during the period 2011–2015, the authors apply panel data econometrics in their estimations.FindingsThe results indicate that the notation by a rating agency positively and significantly affects the financial return of MFIs. The quality and the regularity of the audits negatively and significantly influence the financial performance (measured by return on assets and operating self-sufficiency) but favorably and significantly influence social performance (increased number of active borrowers (NAB) and reduced size of loans). Furthermore, supervision increases the amount of individual loans but decreases the NAB, which means deterioration in social performance. Overall, this paper shows that external governance mechanisms significantly affect the performance of Togolese MFIs, but with varying effects depending on the mechanism considered.Research limitations/implicationsThe sample size of 30 MFIs is small, and the geographic coverage of the study is restricted to MFIs operating in the city of Lomé, Togo. The authors did not have access to the information regarding the portfolio at risk at 30 days, even though it is a measure of financial performance. Likewise, we did not have access to the appendices to the financial statements for the calculation of prudential ratios. This method, which consists of asking the institutions using a questionnaire if they comply with prudential standards, may be biased because this study cannot verify the authenticity of the responses given that the standards are quantitative.Practical implicationsThe study findings advocate that improving the financial and social performance of MFIs requires improving the quality of external governance mechanisms. MFIs should then pay close attention to well-functioning external governance mechanisms.Social implicationsAs MFIs are key social actors in a society, all mechanisms that contribute to their efficiency benefit society.Originality/valueThis study contributes to the corporate governance literature by showing that external governance mechanisms influence performance. These external mechanisms are complementary disciplinary measures to internal governance mechanisms and other tools.

Determinants of participation in agricultural group guarantee loans: A case of smallholder farmers in Eastern Uganda.

This paper establishes that agricultural group guarantee loans (AGGLs) are indeed an innovative tool used by Microfinance Institutions (MFIs) to extend credit to resource-disadvantaged smallholder farmers regarded as not credit-worthy by traditional lenders. It disproves popular literature that one requires assets to access formal credit and that extremely poor farmers are segregated from borrowing citing a lack of collateral to pledge to both group members and to the lender. This paper indicates that efforts to get smallholder farmers out of destitution should be redirected to addressing other group credit aspects other than increasing participation. Multi-stage sampling obtained 161 agricultural loan borrowers of Promotion of Rural Initiative Development Enterprises (PRIDE) microfinance, a formal Tier III credit institution in Uganda. Both borrowers of the group (AGGLs) and Individual (Individual Loan borrowers, IL) loans were selected for comparison purposes. Semi-structured interviews and in-depth discussions with farmer groups (focus group discussions, FGDs) collected both quantitative and qualitative data for the study. Descriptive statistics analysis presented the socioeconomic characteristics of the borrowers while the binary logistic regression model determined the factors that influence participation in AGGLs. The findings indicated that IL borrowers were better off in socioeconomic aspects such as income than AGGL borrowers. The study results revealed that the probability of participating in AGGLs decreases with an increase in the number of asset ownership and an increase in household expenses, particularly education. This implies that AGGLs are socially perceived to be a “facility for the poor”, supporting the motives of MFIs. Agricultural group guarantee loans are associated with smaller loan amounts due to fear of default. These smaller amounts limit investment and consequent income improvement. This is the first paper to study participation in AGGLs offered by a formal credit institution in Uganda. Other group loans offered in Uganda do not target agriculture, those that do, are offered by savings and credit cooperative organizations (SACCOs) informally started by farmers. Key words: Agricultural lending, Smallholder farmers, Collective action, Group participation, Uganda

Who is brave enough to start a new business during the Covid-19 pandemic?

PurposeSince introducing the UK start-up loan (SUL) Scheme in 2012, 82,809 new start-ups have been supported with loans totalling £759m. Even during the Covid-19 crisis, new business start-ups supported by SUL did not abate. The authors ask whether the entrepreneurs starting businesses during the Covid-19 crisis were different from those becoming entrepreneurs before the pandemic. This paper aims to discuss the aforementioned question.Design/methodology/approachThe authors model the differences between pre-Covid-19 business start-ups and Covid-19 start-ups. The administrative data obtained from the UK Government Department for Business, Energy and Industrial Strategy (BEIS) represent information about individual loan records for 82,798 individuals and total lending of £759m between 2012 and 2021. The probit regression model with dependent variable coded one if the start occurred after February 2020 and zero between 2012 and February 2020, was estimated.FindingsThe study’s findings show that both groups of entrepreneurs differ in many facets. The new Covid-19 entrepreneurs are older, more likely to have a graduate-level education and are significantly more likely to make this transition from full-time waged employment or inactivity. Furthermore, they are more likely to set up in manufacturing industries at the business level than their pre-Covid-19 counterparts who favoured service sectors. Finally, their initial lending to support the start-up is much higher.Originality/valueThis study provides value for the policymakers responsible for the administration of the SUL scheme, and it also contributes to the body of knowledge on the effects of the global Covid-19 pandemic.

Did small banks trade off lending with government bond purchases during the Sovereign debt crisis?

At the beginning of the decade, many banks in euro-area periphery countries shifted their portfolios from corporate lending towards sovereign debt holdings. According to some scholars, this was the result of the moral suasion exerted by domestic authorities; others suggest instead that it was the outcome of a free choice of weak banks that bet-for-resurrection increasing the holdings of risky, high yielding government bonds. Our analysis shows that the contemporaneous increase in banks’ total assets and the portfolio readjustment from loans to government bonds can be explained by a surge in the risk-premium required by banks on corporate lending. After briefly describing our hypothesis within a simple model of a bank’s portfolio choice, we test its empirical implications on a large sample of individual loan data granted by over 100 Italian small banks during the post sovereign debt crisis period (2012–2014). Our results provide convincing evidence in support of the hypothesis that the banks which increased the most their government bond holdings were also those which reduced more significantly their credit supply.

Loan Default Prediction in Microfinance Group Lending with Machine Learning

Microfinance fintech enables the unbanked and underbanked communities to access credit by offering small, no collateral loans. Microfinance institutions (MFI) usually use credit scoring to filter out risky borrowers. Credit scoring method for individual loans has been widely studied. However, none are for group lending where members are women micro-entrepreneurs in a developing country, and jointly responsible for loan repayment. This research try to build a credit default prediction model for microfinance group lending using machine learning techniques. We examine six different machine learning methods, including XGBoost, logistic regression, linear discriminant analysis (LDA), decision trees, k-nearest neighbour (KNN) and random forest. The XGBoost model performs the best during the first modeling phase. With an accuracy of 0.97 and an AUC score of 0.85, it performs better than other models. Decision tree and random forest give comparable outcomes, with AUCs of 0.81 and 0.80 and accuracies of 0.81, 0.95, and 0.97. In an effort to increase performance, class balancing is performed. The XGBoost model's performance was successfully enhanced, resulting in an increase in AUC from 0.85 to 0.89. Its accuracy stays the same as 0.97. False positive and false negative rates for this model are both low (2.05% and 1.38%, respectively). Consequently, the model has been effectively developed and is capable of differentiating between bad and good loans.

Inventory credit, a system to improve food security in sub-Saharan Africa

Inventory credit is being developed in several Sahelian countries. This device is implemented by a farmers’ organisation and a financial institution. It consists in storing a portion of harvested grain in a warehouse for several months in exchange for an individual loan. Without this loan, farmers tend to sell their grain immediately after harvesting in order to pay off their debts or to meet their needs. The consequence is that families subsequently struggle to get through the lean season – the transition period between the depletion of food stocks and the new harvest – and to invest in their agricultural production systems. An impact assessment study conducted in western Burkina Faso shows that inventory credit increases food availability in the lean season and boosts agricultural investment and production. To accelerate its development, three conditions must be met: providing access to suitable storage facilities; ensuring the quality of products stored; and building trust between financial institutions, producers’ organisations and traders. The latter condition is undermined by the expansion of armed conflicts in the Sahel.

Социально-экономические детерминанты потребления табачной продукции в регионах России

Nowadays, it is necessary to analyse the influence of various socio-economic factors on the regional heterogeneity of tobacco consumption in Russia, since there is a lack of econometric studies based on regional data. The present study aims to assess the impact of financial, economic and educational factors on tobacco consumption in Russian regions. To this end, a simultaneous quantile regression approach, resistant to outliers, was applied to separately estimate the influence of the above factors on regions classified as light and heavy smokers. Panel data on 82 Russian regions for the period 2005-2019 was examined. The dependent variable is the percentage of household expenditures on tobacco obtained from a sample survey of household budgets. The main independent variables are education, income, unemployment, loan debt. Control variables include alcohol consumption, male-to-female ratio, divorce rate, proportion of the rural population, binary variables. The invariance of the impact of factors relative to the percentiles of regions was revealed. The greatest differences are observed between light and heavy smokers regions (q10 and q90 groups). Individual loan debts, average per capita income, alcohol consumption, increase in excise tax, divorces and emergence of e-cigarettes are significant for regions with low tobacco consumption and insignificant for regions with high consumption. High consumption regions are greatly influenced by the male-to-female ratio, number of graduates of secondary vocational institutions and proportion of the rural population. Such factors as higher education, crises and anti-tobacco laws are significant for each quintile. The results can be used to improve state policy measures to reduce the consumption of nicotine products. The study is limited by the lack of regional data in terms of age and gender.

Low-carbon transition risks for India’s financial system

As the low-carbon transition accelerates, loans to and investments in carbon-intensive assets, firms and sectors are at risk of not generating the anticipated returns, with implications for individual financial institutions as well as financial markets more broadly. However, research on this topic has largely been focused on high- and upper-middle income economies to date. In this paper, we explore the salience of this issue in India – one of the world’s largest emitters and economies – by asking: (1) how extensive is financial-sector exposure to transition risks? And: (2) are finance professionals and financial institutions taking sufficient action to manage those transition risks? Our findings reveal that India’s financial sector is much more heavily exposed to low-carbon transition risks than standard borrowing classifications might suggest. For example, our granular assessment of individual loans and bonds finds that three-fifths of lending to the ‘mining’ sector is for oil and gas extraction, while one-fifth of ‘manufacturing’ debt is for petroleum refining and related industries. We also find that electricity production – by far the largest source of emissions – accounts for 5.2% of outstanding credit, but that only 17.5% of this lending is to pureplay renewables. Yet our survey of India’s largest financial institutions suggests that there have been limited efforts to identify, measure or manage low-carbon transition risks. Fewer than half of the 154 finance professionals surveyed were familiar with environmental issues including climate change mitigation and adaption, greenhouse gas emissions or transition risks. Only four of the ten major financial institutions surveyed collect information on ESG risks, and these firms do not systematically incorporate that data into business continuity planning, internal capital adequacy assessment processes, credit risk assessments, enterprise risk management frameworks or loan product pricing. Given extensive financial-sector exposure to low-carbon transition risks coupled with the absence of bottom-up action to manage those risks, our findings suggest that financiers, regulators and policymakers in emerging and developing economies should be acting swiftly to ensure an orderly transition to net-zero.