Loan Component Research Articles

The impact of entrepreneurship training and credit on the labour market outcomes of disadvantaged young people

ABSTRACT This paper estimates the impact of a program providing classroom and on-the-job entrepreneurship training followed by the provision of a loan to disadvantaged youth. We find that the program increases employment by seven percentage points and income by 21 per cent. The impact is larger for women than men. Furthermore, the results demonstrate an increase in the propensity to save by 17 percentage points with an increase in both the amount of loan taken and outstanding. Nevertheless, the effect of the training component of the program shows no statistically significant impact on income and hours worked. However, the additional impact of the loan component is notable, increasing hours worked as well as earnings.

Assessing banks’ resilience: A complementary approach to stress testing using fair values from banks’ financial statements

AbstractFor more than a decade, supervisory banking authorities in Europe and the United States have sought to assess the resilience of banks to adverse economic episodes to safeguard the financial system's stability. They rely on regulatory capital measures like Common Equity Tier 1 (CET1) relative to risk‐weighted assets in the aftermath of potential economic crises. We propose a new measure of banks' resilience based on financial statements. The fair value margin (FVM) is estimated as the difference between the fair value of assets and the book value of liabilities, scaled by the book value of equity. We find that FVM is positively associated with the surplus or shortfall of CET1 resulting from the stress testing results from 2014, 2016 and 2018. To corroborate the relevance of FVM for supervisory authorities, we compare the ability of the loan component of FVM to predict future credit losses with the capital surplus/shortfall metric derived from the stress test. The findings indicate that the fair value of loans predicts net charge‐offs better than stress test outcomes. Therefore, we suggest that FVM could be used as a readily available and relatively low‐cost tool to assess bank resilience, thus complementing the stress test exercises.

Agricultural Indebtedness in Andhra Pradesh

One of the perennial evils prevailing in the Indian agrarian economy has been the rural indebtedness. The Indian farmer who is traditionally poor resorts to loans not only to meet the expenditure on his farming but also on his family. He has been borrowing from whatever source available and due to various reasons the farmer is not in position to repay the loan. The debt gets accumulated and he is trapped into indebtedness. The agricultural indebtedness was growing steadily and assumed serious proposition which caused grave concern to the farmers and administrators. In order to examine the indebtedness, the study was undertaken in three districts of Andhrapradesh namely Guntur, kadapa and Warangal representing three regions of Andhra Pradesh. Data was collected from 180 farmers through personal interview method. The magnitude of the debt has increased with increase in size of land holding and average debt of sample farmers was V, 95, 700. Debt asset ratio was high with 1.67 on small farms compared to medium and large farms. Nearly 71.8 per cent of total debt was incurred for productive purpose and 28.2 percent for consumption purpose. Crop loan accounted for 57.75 percent of total productive debt followed by other purposes. Source wise debt revealed that 54 per cent of total debt was owed to non institutional agencies and 46 per cent to institutional agencies. Crop failure, high cost of cultivation dependence on private agencies high interest rates inadequate irrigation facilities, low income, inadequate marketing facilities are reasons for the indebtedness as expressed by the sample farmers. Regression analysis revealed that farm expenditure was found to be positively influencing the indebtedness in all size groups of farmers. Various aspects of credit provided by both public and private sources revealed that accessibility to institutional credit was very limited particularly in case of small farms. Provision of adequate irrigation facilities, enhancement of crop loan component, provision of market finance, suitable legislations for curbing the activities of moneylenders and enactment of comprehensive and fool proof of Agricultural indebetness Act are some of the measures suggested to tackle the problem of Agricultural indebtedness.

What Drives Foreign Direct Investments into West Africa? An Empirical Investigation

AbstractThis paper analyzed drivers of foreign direct investments (FDI) to West Africa using a panel dataset from 1970 to 2010. OLS and GMM techniques are used for the estimations. The main results indicate that there is a U‐shaped relationship between economic development and FDI inflows to West Africa. In summary: (i) The quadratic element of real per capita GDP, domestic investment, trade openness, first year lag of FDI, natural resources (oil and metals) endowment and exports, and monetary integration have positive and significant effect on FDI inflows to West Africa; and (ii) there is a negative relationship between FDI inflows to the sub‐region and loan component of ODA, economic growth, level of economic development (real GDP per capita), life expectancy, and domestic credit to the private sector.

Determinants of Deposit Money Banks' Profitability in Nigeria

Determinants of Deposit Money Banks' Profitability in Nigeria

Constrained after college: Student loans and early-career occupational choices

In the early 2000s, a highly selective university introduced a “no-loans” policy under which the loan component of financial aid awards was replaced with grants. We use this natural experiment to identify the causal effect of student debt on employment outcomes. In the standard life-cycle model, young people make optimal educational investment decisions if they are able to finance these investments by borrowing against future earnings; the presence of debt has only income effects on investment decisions. We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid “public interest” jobs. We also find some evidence that debt affects students' academic decisions during college. Our estimates suggest that recent college graduates are not life-cycle agents. Two potential explanations are that young workers are credit constrained or that they are averse to holding debt. We find suggestive evidence that debt reduces students' donations to the institution in the years after they graduate and increases the likelihood that a graduate will default on a pledge made during her senior year; we argue this result is more likely consistent with credit constraints than with debt aversion.

A Financial Contracting Approach to the Role of Supermarkets in Farmers’ Credit Access

Traditional moneylenders monitor farmers to ensure that their investment is not diverted. Modern farming contracts offered by supermarkets in developing countries often entail a loan component, and monitoring arises as well. However, unlike moneylenders, supermarkets do care about the attributes of the product. Whether such attributes are obtained is influenced largely by the advice and the extension services received by farmers. We build a financial contracting model where we show that supermarkets optimally undertake both the monitoring and the advisory missions. This contract is shown to potentially enhance credit access for small farmers but sometimes also involves excessive monitoring.

Constrained after College: Student Loans and Early Career Occupational Choices

In the early 2000s, a highly selective university introduced a no-loans policy under which the loan component of financial aid awards was replaced with grants. We use this natural experiment to identify the causal effect of student debt on employment outcomes. In the standard life-cycle model, young people make optimal educational investment decisions if they are able to finance these investments by borrowing against future earnings; the presence of debt has only income effects on future decisions. We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid public interest jobs. We also find some evidence that debt affects students' academic decisions during college. Our estimates suggest that recent college graduates are not life-cycle agents. Two potential explanations are that young workers are credit constrained or that they are averse to holding debt. We find suggestive evidence that debt reduces students' donations to the institution in the years after they graduate and increases the likelihood that a graduate will default on a pledge made during her senior year; we argue this result is more likely consistent with credit constraints than with debt aversion.

A Financial Contracting Approach to the Role of Supermarkets in Farmers' Credit Access

In developing countries, moneylenders who lend to farmers monitor them to make sure that their investment is not diverted. Similarly, modern production contracts offered by supermarkets or agro-export firms entail a loan component under the form of input advances and, like traditional moneylenders, supermarkets also want to make sure that this investment is not diverted. However, unlike moneylenders, supermarkets do care about the attributes of the product (form, quality, food safety, etc.). Whether such attributes are present in the harvested product is largely influenced by the advice and the extension services received by the farmer. We built a financial contracting model where we show that supermarkets, choosing to forgo specialization, optimally delegate to a multi-tasking agent both the monitoring and the advisory missions. This contract is shown to potentially enhance credit access for small farmers and sometimes to involve excessive monitoring. Finally, when involved in production, small farmers are shown to benefit the most, even though the supermarket has all bargaining power when making the contract offer.

Housing the Poor

In 2008, for the first time in the human history, more people will begin to live in cities than in villages. In India the urban population is expected to become 576 million in 2030 from the current 328 million. With rapid urbanization, one big challenge facing urban planners and governments today is providing affordable housing to the city dwellers especially the poor. Housing is integral to the well-being of a family. Poor housing and a poor general environment (the social and physical characteristics of the surrounding area) has been linked with increased levels of respiratory infections and water and food borne diseases, accidents, psychological problems and even increased mortality. However, over a billion people around the world live in appalling conditions of urban slums lacking the benefits of adequate housing. In India alone, about 100 million persons live in slums and slum like conditions without adequate basic facilities such as piped water, sanitation, school, health etc. These numbers are expected to touch 200 million by 2020. On most of the habitat forums, the catch word these days is making cities “slum free. However, it is important to recount that the past efforts particularly those involving surgical removal and transplantation of slums to the outskirts of the city have often failed in many instances. When dealing with such a large number of disadvantaged human beings, it is imperative to adopt sensitive and holistic strategies that can improve all aspects of lives of slum dwellers such as education, health, livelihood etc. Provisions for institutional housing finance to the urban poor also need to be strengthened. Though, finance institutions like HUDCO earmark more than 50% of its housing portfolio funds for the urban poor and make special provisions such as lower interest rates, up to 90% of loan component in the unit cost and longer repayment period. However, housing loan finance still remains a distant dream for most of the urban poor for reasons such as affordability and lack of information. There is a need to generate demand among the urban poor by informing them through advertising and other means of communication. Government bodies should seek support from NGOs and other civil society organizations in planning houses for the poor in terms of design and facilities. They can ensure the involvement of the urban poor in housing and resettlement efforts so that the plan is developed by the people themselves who have to be settled and relocated. Finally, it is also important to look for new methods of land use planning and management factoring in the population growth projections. We can nurture more middle level cities to offload mega cities to some extent.

Multilateral and Bilateral Loans versus Grants: Issues and Evidence

This paper examines a wide range of issues relating to the mix between loans and grants as well as the degree of concessionality of loans. A number of empirical tests are carried out based on annual panel data over 1970 to 1999 for 22 donor countries and 72 recipient countries. Based on the tests, we observe that for bilateral donors, past grant‐loan mix (and, hence, reflows from past transfers) do not influence the volume of current resource transfers. Our tests also show that the rate of official borrowing by the recipients (and, by deduction, the extent of their past debt burden) is positively influenced by the extent of the concessionality of such loans – irrespective of whether it is in the form of subsidised interest rates or longer grace periods. The paper concludes with a review of the circumstances in which grants, soft loans and non‐concessional loans might have their respective comparative advantage, as well as a discussion of the need, so as to overcome the negative incentive problems of soft loans, for a typical concessional loan package to be separated into two constituent parts. This would enable the recipient to be given the grant component and the option to take from the non‐concessional loan component as much as desired.

Banking, Business Cycles, and the Basle Accord: Some Empirical Evidence

This paper presents a theoretical and empirical analysis of the portfolio adjustments and financing adjustments of U.S. banks over the business cycle. The model describes a representative bank whose portfolio is financed with deposits and equity claims. At the core of the model is a moral hazard problem between relatively more risk averse depositors and relatively less risk averse equity investors. The solution to this moral hazard problem takes the form of shared management of the bank between depositors (or the deposit insuring agency) and equity investors. Towards this end portfolio decisions are made to conform to the risk aversion of equity investors, while financing decisions are made so as to offset any changes in portfolio risk caused by portfolio adjustments. Portfolio adjustments in turn are initiated by exogenous changes in the risk aversion of equity investors that are revealed to bank managers in equity share prices. The resulting portfolio adjustments and changes in portfolio risk then triggers financing adjustments that insulate depositors from any changes in portfolio risk. The model predicts that the loan component of a bank's portfolio is positively related to changes in bank stock prices, while the equity leverage ratio varies directly with the bank's loan to asset ratio. The regression evidence in this paper does not reject these two predictions. Finally the financing adjustments uncovered here were found to predate U.S. capital adequacy legislation for banks. This suggests that private arrangements may have achieved much the same qualitative results in the past as the Basle Accord now attempts to achieve with regulatory legislation.

Making urban sector lending work; lessons from a capacity building programme in Karnataka, India

This article presents experiences with human resource development and `capacity building programmes’ in urban sector lending by multilateral agencies. The article first reviews the history of `capacity building’ and provides a view on its meaning. The experiences with a capacity building programme, part of an infrastructure loan to the state of Karnataka in India, are subsequently elaborated as an illustration. The article seeks to identify the factors determining the success of capacity building programmes which are part of urban lending. It concludes first that Terms of Reference, drafted in a bottom–up and demand-driven fashion are a better guarantee for ownership, commitment and positive results. Secondly, capacity building activities need to be tailored to the ability of the towns to make changes in their operation. Finally, capacity building at local government level can only be effective if reciprocated by supportive measures of state governments. The paper also argues that Technical Assistance (TA) as a component of capacity building should be more strongly integrated in the loan component activities and continue throughout the project period.

From community development to housing finance: from Mutiroesto Casa Melhorin Fortaleza, Brazil

This paper describes two new approaches to financing and supporting the improvement of housing and living conditions for low-income groups in Fortaleza, capital of one of the poorest Brazilian states. The first is the comunidades programme which primarily supports the development of new homes, settlements and income-generating activities for the lowest-income groups through mutirão , mutual self-help (as the participants collectively build and also manage the building process). This is sometimes known as the mutirão programme. The paper presents a case study of one project within this wider programme, Parque Havaí , to illustrate how it works. The second programme described is the casa melhor (meaning “better house”) which provides loans, subsidies and technical support to households living in squatter settlements or other poor quality settlements to improve, rebuild or expand their homes. Although there are elements of mutual aid, this is primarily support for individual selfhelp. In Section III, the paper explains how this fund was developed, along with support programmes provided by NGOs and government agencies to help it function. The programme is financed through a combination of savings, loans and subsidies and has achieved high rates of repayment for the loan component. This section also describes its achievements and limitations - and what possibilities exist for scaling-up the support for housing finance of this kind to meet growing demand. The concluding section reflects on what the experience with both these programmes implies for future work in this area.

Addressing the Special Needs of International Students in Interlibrary Loan:

This paper looks at how international students encounter the interlibrary loan process in the academic library, and describes some of the stumbling blocks that these students have in using the interlibrary loan system. The interlibrary loan borrowing interview and bibliographic instruction with an interlibrary loan component are recommended as effective methods of teaching international students about interlibrary loan. The paper also explores how an interlibrary loan department can access the foreign research materials requested by international students.