Lending Criteria Research Articles

Role of Msmes in Stirring The Social Economy at Bengaluru

Micro, Small and Medium Enterprises (MSMEs) in Bangaluru is a critical contributor to the economic escalation and employment generation. This study aims to explore the issues regarding the performance and progress of MSMEs. The study is descriptive in nature, both primary and secondary data collected and appropriate statistical tools employed to draw the inherent facts about MSMEs performance. The study divulged that the MSME sector in Bengaluru faces challenges, such as access to finance, infrastructure constraints, and regulatory compliance. MSMEs rely on traditional banking channels for financing, while few look for NBFIs because of their flexible lending criteria. The future growth and prospects of MSMEs in the services industry are promising, By embracing innovation, collaboration, sustainability, talent development, market differentiation, customer-centricity, agility, resilience, continuous improvement, adoption of emerging technologies, focus on data analytics, expansion into niche markets, and adoption of flexible business models, MSMEs can unlock their full potential and grow. With the right support, resources, and strategies, MSMEs can take advantage of the growing demand for services and emerging opportunities in the digital economy.

Challenges Faced by Start-up Entrepreneurs in Agriculture Sector to Access Finance: A Case of Agro-dealers in Zambia's Central Province

<i>Background:</i> This study evaluated financial barriers limiting the growth and sustainability of agro-dealers in Zambia's Central Province. It also examined the impact of these challenges on the agricultural supply chain, assessed the adequacy of existing financial services, and investigated the role of government policies, financial institutions, and development programs in facilitating or hindering access to finance. <i>Methods:</i> Using a cross-sectional design, the study surveyed 384 agro-dealers. Data were collected through structured questionnaires and analyzed using descriptive statistics and logistic regression models to identify predictors of credit access and sales impact. <i>Results:</i> Major financial barriers identified were high interest rates (80.2%), collateral requirements (85.1%), and complex application processes (76.8%). These barriers led to inadequate stock (87.2%), lost sales (82.0%), and reduced product quality (50.8%). Logistic regression showed high interest rates significantly increased credit access (AOR = 6.68) and increased sales impact likelihood (AOR = 5.71). Collateral requirements also increased sales impact likelihood (AOR = 4.07). Thematic analysis highlighted inadequate government support, stringent lending criteria, and limited development program reach. <i>Conclusions:</i> The study highlights the need for targeted interventions, including simplifying application processes, developing tailored financial products, increasing government support, and enhancing development program reach. These measures are crucial for improving agro-dealers' financial stability and growth, thereby strengthening Zambia's agricultural sector and economy.

Evaluating the impact of demographic characteristics on residential mortgage default risk: Evidence from Lebanon

Purpose: This study aims to examine the relationship between borrower's demographic characteristics and default risk in mortgage loans to help financial institutions develop more effective lending policies. Design/Methodology/Approach: Cross-sectional data were elicited from randomly selected 6743 individual accounts from Lebanese housing banks. This study applied the binary logistic and stepwise regression models to analyze the dataset using the Stata statistical software. Model diagnosis is performed using the Hosmer-Lemeshow goodness of fit test, likelihood ratio test, model accuracy classification table and statistically significant test-ROC curve. Findings: The findings revealed that there is a significant relationship between residential loan default risk and borrower’s marital status, nature of job occupation, job economic sector, job location and loan purpose. The performance of the binary logistic regression analysis demonstrates the overall percentage who is correctly classified is 91.61%. Conclusion: The log odds of default risk for widowed borrowers are about 90 percent higher than those of divorced borrowers and that of self-employed borrowers is about 54 percent higher than that of employed borrowers. Borrowers working in the banking and real estate sectors have lower default rates than borrowers working in other economic sectors. In addition, loans granted for renovation purposes have the lowest default rates compared to loans provided for purchase, under-construction and construction purposes. Practical Implications: The empirical results help financial institutions to have early warning signals in detecting financial distress and to differentiate between a high- and low-risk group of borrowers, helping in the development of tailored risk mitigation strategies and adjusting the lending criteria.

EFFECT OF MORTGAGE FINANCING ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

<p>The financial performance of commercial banks has been unstable as evidenced in Annual Supervision Report of 2011 to 2020, where the Return on Assets (ROA) rose to 6.2% in 2012 from 3% in 2011; and to below 3% in the years 2016 to 2020. Literature reveals that commercial banks’ lending criteria are pro-cyclical, implying a less strict lending criteria during the real estate boom, and very strict during burst; resulting in likely underestimation of the default risk on loans during periods of high demand by the commercial banks. The objective of the study was to establish the effect of mortgage financing on the n financial performance of commercial banks in Kenya for the period 2015 to 2022. Using secondary balanced panel data from 27 mortgage-offering banks in Kenya, with 189 data points and employing moderated multiple regression to achieve the study objectives. The regression analysis revealed that the independent variables explained 86.69% (R<sup>2 </sup>= 0.8669, p-value = 0004) of variance in of financial performance of commercial banks in Kenya, the coefficient of mortgage financing is 0.004434, (p=0.0004); implying that a unit increase in mortgage loan would result to significant increase in the return on assets by 0.004434 units. Therefore, the null hypothesis was rejected. The study concluded that an increase in the amount of mortgage loans offered as well as other activities that augment the total value of mortgage loans extended by the commercial banks leads to a significant improvement in the financial performance of commercial banks in Kenya. The study recommends that commercial banks in Kenya should target to increase the amount of mortgage offered as well as other activities that augment the total value of mortgage loans extended in order to improve their financial performance.</p><p><strong> </strong></p><p><strong>JEL</strong>: D10; D14; G21</p><p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/soc/0081/a.php" alt="Hit counter" /></p>

Fintech and investment risk of digital finance: mediating role of clean energy and green bonds through the dynamics of spill over.

This study examines how financial technology (FinTech) and green bonds have affected the ability of firms to finance energy efficiency measures by using data obtained from a subset of Chinese companies listed on the A-share market between 2011 and 2021. We apply the quantile-on-quantile method, which allows us to examine the interdependence of time series in each economy separately and yields data on the global and national levels indicating the relationship between the variables. The results show that an increase in both direct and indirect financing for businesses, as well as inter-bank competition, can greatly mitigate the financial limitations that firms suffer as a result of FinTech expansion. Our estimates show that the energy efficiency of the countries we chose improves when they are financed with green bonds across all quantiles of the data. Organizations not owned by the state, SMBs, and the more rapidly developing eastern half of China promise to benefit the most from the moderating effect of FinTech because of the faster pace of development there. The immediate ameliorating effect that financial technology has on reduced lending criteria mostly benefits businesses with either a strong innovation rate or a poor social responsibility performance rate. This is because businesses sharing either of these features are more likely to experiment and develop new products. Both theoretical and practical repercussions of this finding are explored.

Banking on alternative credit scores: Auditing the calculative infrastructure of U.S. consumer lending

Alternative credit scores have become an increasingly important tool for lenders to assess risk and authorize investment in consumer debt. Using alternative data and processing techniques that leverage machine learning (ML) and Artificial Intelligence (AI), these models are designed to bypass existing barriers to risk-based pricing, which is the idea that financial institutions offer different interest rates to consumers based on their likelihood of default. Through an algorithmic audit of one lender's (Upstart) credit scoring model, I find that alternative data, particularly whether an applicant has a bachelor's degree, strongly impacted loan outcomes. This raises important equity concerns about overhauling lending criteria via opaque models that restructure the logic of risk assessment. In following the logic of risk assessment generated by Upstart's model, I also audit three fintech-bank partnerships and examine the balance sheets of banks providing capital via Upstart's platform. This is done to demonstrate rising capital allocation to these types of loans at banks engaged in fintech-bank partnerships, in one case rising from 0.14% to 15.6% of the banks’ balance sheet over three years. My analysis shows that alternative credit scoring systems function as a key piece of calculative infrastructure, which allows some institutions to bypass barriers to risk-based pricing, and becomes an infrastructural site for tech startups to partner with financial institutions seeking out new sources of revenue.

The Global Financial Crisis and Its Aftermath

This review of the 2008 financial crisis discusses the triggers of the crisis, the direct consequences, and the policy responses to the crisis. Pre-crisis condition is analyzed in linear time order: the Federal monetary policy, with the motivation to stimulate the economy, set loose lending criteria and facilitated the increase of subprime mortgages. Based on the subprime mortgage, credit default swaps (CDS) emerged as a new derivative of arbitrage and speculation without adequate regulation. Rather than its original use of risk diversification and transfer, such expansion of CDS eventually led to contagion, dragging the whole market into crisis. Direct consequences include mass unemployment, reduction in corporate investment, and bankruptcy of giant banks such as Lehman Brothers. A series of policies were released to suppress the contagion of the crisis and help the economy recover, among which the Dodd-Frank Act and Basel III serve as necessary regulations. The government had interfered with the housing market, which suffered from the burst bubble; bank regulators had re-examined the rules, adjusting the fraction of capital reserves required for banks.

Bank branching deregulation and the credit risk of the regional banking sector: Evidence from city commercial banks in China

From 2006 to 2011, with the change in regulatory policies, most regions of China relaxed restrictions on the intercity branching of city commercial banks, which led to a significant increase in the number of nonlocal branches of city commercial banks. We assess the impact of this bank branching deregulation on the credit risk of the regional banking sector across 286 prefecture-level cities in China. We find that deregulation has increased the credit risk of the regional banking sector in host cities by intensifying competition and encouraging risk-taking behaviors such as “lowering lending criteria” and “attracting deposits with higher interest”. Moreover, this effect becomes more pronounced in regions with a higher initial level of the loan-to-deposit ratio and regions with a higher initial level of competition in the banking sector.

The impact of the cost-of-living crisis on British credit unions and community lenders

Credit unions are often hypothesised to be less vulnerable to crises than other types of businesses. This paper examines the impact of the cost-of-living crisis on the British credit union and community lender sector drawing on interviews with 25 managers and a focus group with four loan officers. This crisis is affecting businesses and households through high inflation, declining real pay, rising interest rates, and falling economic growth. The findings suggest that credit union and community lender customers are experiencing a deterioration in their finances. They save less, have more unsecured debts, are less likely to qualify for a loan, and are more likely to default on loan payments. Lenders are grappling with a tension between supporting customers affected by the crisis and preserving their own financial position. On the one hand, there is evidence of lenders providing additional support to their members, including emergency loans and hardship payments. On the other, they are mitigating the risks of deteriorating customer finances by tightening lending criteria and reducing lending to higher risk groups. The findings underline the need for future research into the long-term effects on the sector and its ability to provide finance to underserved communities.

How Have District-Based House Price Earnings Ratios Evolved in England and Wales?

The central aim of this paper is to provide a baseline framework for describing the evolution of an affordability indicator at a district level, before and after the financial crisis of 2008. From the mid-1990s to 2019 house price-earnings ratio for England and Wales appear to have ratcheted-up, with the growth rate more rapid just before and a temporary decline just after the crisis. This masks a significant variation in evolutionary profiles. Following Turok and Mykhnenko in 2007 who set about exploring population trends in European cities, districts are classified into groups. Matching each district against ten stylised profiles, rather than cycles, persistent trends and single turning point paths in ratios are the norm. An asset-price model projects that finance will favour those bright futures so that spatial-sorting of those with high human capital leads to some districts benefitting from lending criteria out of line with others.

SME CREDIT RISK MODELLING IN SOUTH AFRICA: A CASE STUDY

This paper examined the funding conundrum by assessing the success rate of applications of small and medium sized enterprises (SME) for commercial bank funding. A quantitative group analysis was done on the overdraft obtained from one of the leading financial institutions in South Africa to determine the drivers of default. The SME scorecard was developed using logistic regression on credit applications over a seven-year observation period to analyse the default experience as part of credit risk management. The robustness, stability and relevance of an application scorecard is enhanced by the reject inference process and inclusion of bureau information. Small businesses operating in the service sector and having a long-standing rapport with the bank can easily access commercial bank funding. SMEs in the construction industry with a high number of credit enquiries are unlikely to survive the stringent conditions of the bank lending criteria. It is the prerogative of the principal business owner to honour their financial obligations across the credit industry if commercial bank funding is desired. Their credit quality, as reflected in the bureau information, forms the fulcrum of the SME application scorecard. The model developed in this study can be used as a tool to reduce defaults and serious delinquencies in boarding new applicants. Furthermore, the model can be applied to determine risk tendency and monitor the performance of SME credit portfolios.

PERAN AUDIT EKTERNAL DALAM MEMAJUKAN USAHA KECIL DAN MENENGAH DI JAWA TENGAH: SEBUAH KAJIAN KONSEPTUAL DI JAWA TENGAH: SEBUAH KAJIAN KONSEPTUAL

: Small and Medium Enterprises (SMEs) are the backbone of the economy in most countries around the world, including Indonesia. In Central Java, until the end of the fourth Quarter of 2016, there were 115,751 units of SMEs contributing for 791,767 jobs. Some of the weaknesses of SMEs compared to large and modern businesses is the limited financial condition and difficulties faced when it will apply for funding to the bank. It is because SMEs generally are unable to present the financial statements in accordance with the accounting standards as one of lending criteria from the bank. To overcome the problem, the financial statement of SMEs should be audited by the independent auditors. Therefore, the financial statement of SMEs will be more reliable so that the bank will approve SMEs credit application. In another word, the audit for SMEs can be said as one of the ways to overcome the weakness of SMEs so that SMEs will become more bankable.  

How to support the economic recovery of aviation after COVID-19?

The still ongoing COVID-19 pandemic lead to the most significant decrease in global air transport passenger traffic in aviation history. This decrease has been caused by a combination of demand and supply shocks. Main reasons for these shocks were the global travel restrictions, border closures, the rules and regulations for physical distancing as well as income losses of both private companies and private households even though financial support has been provided by many governments. As a consequence, airlines worldwide had to cut down the number of operated routes and flights significantly. Since February 2020, both the number of global passengers and passenger flight kilometers decreased by 80 per cent and more). These developments have caused large financial losses both for airlines and airports worldwide, critically threatening the existence of a large number of these companies. This paper investigates whether and how the economic recovery of the aviation sector should be supported by governments. Our main results indicate that government loans or government secured loans are enabling a well-balanced trade-off between governmental influence, public debt and distortion of competition if the lending criteria are transparent and nondiscriminatory. However, in the course of time, over-indebtedness will become a critical issue for most companies. At this point, non-refundable state grants offer a relatively simple but costly solution since these subsidies will directly increase public debt.

How Risky Is Australian Household Debt?

AbstractHousehold indebtedness has increased substantially in Australia. We consider how significant a risk this debt poses. Our results suggest that banks appear resilient to a severe downturn, thanks to moderate loan‐to‐valuation ratios on residential mortgages and generally sound lending criteria. Household debt seems to pose a bigger risk to consumption, since a large but plausible decrease in asset prices could precipitate a substantial decrease in consumption. Moreover, the increase in indebtedness over the past decade has slightly increased the potential decline in consumption. However, the distribution of debt across households appears to slightly mitigate these risks.

Assessing Funding Mechanism Available for Mining Companies in Zimbabwe

The mining sector has been the cornerstone of economic growth in Zimbabwe hence funding becomes very crucial to resuscitate the economy. The study aimed to assess the funding mechanisms for the mining sector of Zimbabwe and the effect of these on the performance of the sector. A quantitative study was carried out in the mining sector. The research findings showed that respondents pointed out that the funding mechanisms used in the mining sector of Zimbabwe are project finance, finance by private equity, public bonds and loans from banks and other financial institutions. It was also revealed that over and above available mechanisms, investment in the mining sector is being influenced by Interest rate, Business economic empowerment policies, bank lending criteria and Technical information, simultaneously. Furthermore, the study established that the mining sector needs skilled and technical staff, Technical information, banks’ lending criteria and Capital markets to get funding from investors. It was derived that, investment in the mining sector will increase production, product quality and profitability which in turn lead to infrastructural development. In addition, it is envisaged that funding will result in mining exports increase at the same time that new technologies are being introduced and the GDP is rising. Owing to the focus being exclusively on the funding of the mining sector, the study also recommended further studies on other factors, besides funding, that are affecting the performance of the sector.

Has the Crisis Introduced a New Paradigm in Banks' Credit Allocation? The Non‐financial Corporations' Perspective

AbstractIn the years prior to the onset of the global financial crisis, the sharp credit growth, in a context of optimistic income expectations, boosted by an increase in competition in the banking system, less restrictive lending criteria and favorable financing conditions in international wholesale debt market, led to a marked rise in the debt levels of non‐financial corporations. In this paper, we use a panel data regression, with fixed effect estimators, to study how the relationship between bank credit granted to each firm and a set of firm‐specific indicators, that measure overall balance sheet performance and riskiness, changed over the 2006–2017 period. The results suggest that, during and after the Portuguese sovereign debt crisis, the sensitivity of the bank credit granted to firms to overall balance sheet strength and riskiness of firms increased, except in the case of leverage, where the sensitivity decreased slightly. Nonetheless, banks on average lent more to lower leveraged firms than to higher leveraged firms throughout the period considered. The results also show that statistical significance slightly reduces with the size of the firm and, when compared with the pre‐crisis sub‐period, banks did not increase lending to higher leveraged large firms in the crisis and post‐crisis sub‐periods. Finally, we find that the most capitalized banks were the ones more willing and/or able to support firms, during the crisis, even firms that experienced a deterioration in their indicators.

How to finance the transition to low-carbon energy in Europe?

In this paper, we use standard scenarios focussing on renewable energy, energy efficiency and grid investments. We take stock of the literature and quantitative data on available sources of financing for clean energy to qualitatively match supply and demand of specific sources of finance in the European context. Our analysis shows that under the current investment mandates and lending criteria the required funds for a successful energy transition are available. In fact, the current landscape of financing sources can provide between two and six times what is necessary. However, institutional investors and lenders such as pension funds and banks in particular are reluctant to invest in the renewable energy or grid infrastructure because of expected (policy) discontinuities. In addition, more venture capital and household investment are needed to finance low-risk small-ticket projects in the early stages of innovative clean energy technologies, to complement the abundantly available funds for large-scale investments. Based on our analysis, we develop a matrix indicating the role and availability of different sources of finance and new intermediation channels in the energy transition and how these should be deployed.

The Case of Construction Industr An Evaluation of the Lending Model of Commercial Banks in South Africa: The Case of Construction Industry

The purpose of this study was to evaluate the commercial banks’ lending model for small businesses in South Africa. The multiple case study design and purposive sampling were used to select six small businesses from a bank’s database for the study. The qualitative data was categorised and analysed thematically. It was found that the lending criteria are based on the bank and client’s long-term relationship, client’s background, character, collateral, capital, capacity and affordability, that the lending model is helping to grow small businesses in the country. The commercial banks’ lending policy should allow flexibility, among others, in terms of the minimum deposits and interest rates charged.

A Tale of Two Markets: How Lower-end Borrowers Are Punished for Bank Regulatory Failures in Nigeria

In 2009, the Nigerian banking system witnessed a financial crisis caused by elite borrowers in the financial market. Regulatory response to the Nigerian crisis closely mirrored the international response with increased capital and liquidity thresholds for commercial banks. While the rise of consumer protection on the agenda of prudential supervisors internationally was logical in that consumer debt was the main cause of the global recession, the Nigerian banking reforms of 2009 disproportionately affected access by poorer consumers, who ironically had little to do with the underlying causes of the crisis. As lending criteria become more stringent, poorer consumers of credit products are pushed into informal markets because of liquidity-induced credit rationing. Overall, consumer protection is compromised because stronger consumer protection rules for the formal sector benefits borrowers from formal institutions who constitute the minority of borrowers in all markets. While the passage of regulation establishing credit bureaux and the National Collateral Registry will, in theory, ease access to credit especially by lower-end borrowers, the vast size of the informal market continues to compound the information asymmetry problem, fiscal policies to tackle structural economic issues such as unemployment and illiteracy remain to be initiated, and bank regulators continue to pander to elite customers with policy responses that endorse too big to fail but deems lower-end consumers too irrelevant to save. The essay concluded that addressing the wide disparity in access to credit between the rich and poor through property rights reforms to capture the capital of the informal class, promoting regulation to check loan concentration, and stimulating competition by allowing Telecommunication Companies (TELCOs) and fintech companies to carry on lending activities because of their superior knowledge of lower-end markets will facilitate greater access. The risk of systemic failure deriving from consumer credit in Nigeria is insignificant compared to the consumer vulnerabilities resulting from the exposure of consumers to unregulated products in the informal market.

Access to Finance for Women-Owned SMEs in Palestine

The aim of this study is to investigate the effects of collateral requirement, Business support services, High interest on loans, and lack of Information services on access to finance by Women-Owned Small and Medium Enterprises in Palestine , A structured questionnaire was administered on a random sample population of Women-Owned SMEs Enterprises in Hebron and Bethlehem , Out of the 60 questionnaires administered, 54 were filled and returned. This represented a response rate of 90%. Data obtained from the questionnaires were analyzed using the Statistical Package for Social Science(SPSS). Questionnaires were administered on the owners of these SMEs and/ or representatives. Multiple linear regression analysis was used to establish the effects of the market constraints on access to finance by Women-Owned SMEs Enterprises in Palestine. The study indicated that there is a negative correlation between collateral requirements, , High interest on loans, lack of Information services and access to finance by SMEs in Palestine, while there is a positive correlation between Business support services and access to finance SMEs in Palestine. Regression analysis showed that variation in access to finance by SMEs can be explained by collateral requirement, Business support services, High interest on loans, and lack of Information services. The study recommended that, financial institutions should simplify their lending criteria and pay attention to opportunities for financing the promising SME sector rather than requiring high collateral ,Government should increase the little support it offers to SMEs, government should launch interest rate-supported programs to enable SMEs access to funds from banks and other financial institutions at low interest rates, increasing the number of intermediaries between the SMEs and the banks to reduce information asymmetry. Keywords: Women-Owned SMEs ,Palestine , Access to Finance. DOI : 10.7176/RJFA/10-8-12 Publication date : April 30 th 2019