Loan Portfolio Performance Research Articles

Credit Risk Management and Loan Portfolio Performance: Evidence from Selected Banks of Bangladesh

Credit Risk Management and Loan Portfolio Performance: Evidence from Selected Banks of Bangladesh

Religiosity and bank lending: evidence surrounding the pandemic in the USA

Purpose The purpose of this study is to investigate the impact of religiosity on banks’ lending behavior during the COVID-19 pandemic in the USA. Design/methodology/approach This study uses the evidence from the issuance of Paycheck Protection Program (PPP) loans to relate local religiosity to banks’ participation in the PPP loan program and to banks’ loan portfolio performance during the pandemic. Findings The results of this study show that banks located in more religious counties have a higher level of lending through the PPP, supporting the ethical and moral concerns cultivated by local religious beliefs. In addition, banks’ lending before the pandemic is more prudential in more religious areas, as reflected in lower losses and higher returns at the onset of the crisis, especially in areas where business activities were most disrupted, supporting the stewardship role encouraged by religiosity. Originality/value Thanks to the structure of the PPP loans programs, the authors are able to disentangle the conflicting effects of morality and prudence on banks’ behavior.

The impact of demonetization on microfinance institutions

Microfinance institutions (MFIs) must balance financial and social goals. When these coopetitive goals are under threat, which goals do MFIs prefer? Based on the theory of myopic loss aversion, our study aims to assess the immediate effect of the 2016 demonetization in India on MFIs and their loan portfolio performance and on unintended social outcomes. Using the 2016 demonetization in India as a quasi-experiment, we find that MFIs had a lower 30-day and 90-day portfolio at risk (PAR) and implemented better client protection terms. In addition, demonetization had a small but positive effect on developing start-up enterprises and serving more clients below the poverty line. Last, we find that MFIs investing in female client education presented a lower PAR after demonetization. Overall, our study sheds light on the unintended consequences on MFIs as a result of the demonetization event, and it provides policy implications for MFIs.

Cooperative lenders and the performance of small business loans

This study reports that small business loans advanced by cooperative lenders have a significantly lower probability of default than those disbursed by mainstream banks—at least for the first four years post disbursement, during which default costs are highest. Default rates are particularly low among loans to younger, and, to an extent, smaller, firms; and loans to firms that had experienced significant changes in their business environment post-disbursement. These results are consistent with the argument that cooperatives face relatively less severe information asymmetry because their close community ties facilitate soft information production and their governance structures embed self-selection and peer monitoring mechanisms (e.g., Angelini, Di Salvo & Ferri, 1998). Comparison of loan portfolio performance between co-ops and small regional banks suggest that both close community ties and governance structure contribute to cooperatives’ lower default rates. Results are robust to distance and competition effects, and to various alternative explanations.

Basel III liquidity rules: The implications for bank lending growth in Africa

This paper examines the possible loan growth effect of the Basel III NSFR and LCR requirements in Africa and seeks to determine whether the different regions of the continent are affected differently. The paper also offers what is possibly the first investigation of how the interaction between the performance of loan portfolios and the new Basel III liquidity requirements might shape bank loan growth rates. Using a dataset of 361 commercial banks across 38 African countries over the 2005–2015 period, our static and dynamic panel analyses show that both the NSFR and the LCR exert significant positive effects on bank loan growth rates. The results also reveal that the NSFR reduces the impact of the negative effect of poor performance of loan portfolios on bank loan growth rates. Compliance with the Basel III liquidity rules in Africa is therefore likely to have beneficial impacts on policies intended to increase bank lending in the continent.

Credit allocation, risk management and loan portfolio performance of MFIs—A case of Ugandan firms

Purpose: The purpose of this study was to establish examine the relationship between credit allocation, risk management and loan portfolio performance of MFIs in Uganda. Design/methodology/approach...

Does bank supervision impact bank loan growth?

We estimate the impact of a poor bank examination rating on the growth rates of individual bank loan portfolios. We use a novel approach to control for loan demand variation and estimate a fixed-effect model using an unbalanced panel with over 381,000 bank-quarter observations from the period 1994–2011. Our estimates show that a poor examination rating has a large negative impact on bank loan growth, even after controlling for the impact of monetary policy, bank capital and liquidity conditions, and any voluntary reduction in lending triggered by weak legacy loan portfolio performance or other bank losses. This previously unidentified effect is consistent with the hypothesis that the bank supervision process successfully constrains the lending activities of banks operating in an unsafe and unsound manner.

Does Bank Supervision Impact Bank Loan Growth?

We estimate the impact on individual bank loan growth caused by supervisory restrictions associated with a poor bank examination rating. We use a novel approach to control for bank loan demand variation and estimate a fixed-effect model using an unbalanced panel with over 443,000 bank-quarter observations from the period 1994-2011. Our estimates show that supervisory restrictions have a large negative impact on bank loan growth after controlling for the impact of monetary policy, bank capital and liquidity conditions and any voluntary reduction in lending triggered by weak legacy loan portfolio performance or other bank losses.

The Effect of Real Estate Finance on the Financial Performance of Listed Commercial Banks in Kenya: A Panel Evidence

Over the years, real estate financing has been a preserve for mortgage financing companies. With time, commercial banks have started engaging in mortgage financing. With the rising non-performing loans among Kenyan banks, mortgages have seen as a safer bet to improve the loan portfolio performance. The study sought to investigate the effect of real estate finance on the financial performance of listed commercial banks in Kenya. Data for nine listed commercial banks was collected for the period 2009 – 2013 from the annual reports of the respective banks. Panel regression analysis was employed on the collected data. The results showed that real estate finance did not have a significant effect on the financial performance of listed commercial banks. Foreign ownership, market structure, cost of bank operations, and the size of the bank significantly influenced bank performance. The study concludes that real estate finance does not influence the financial performance of listed commercial banks. It is recommended that the Central Bank of Kenya (CBK) and stakeholders in the housing sector strategize to improve uptake of affordable mortgage loans in order to improve the overall performance of banks. This study contributes to literature by providing the link between real estate financing and the financial performance of banks from a developing country’s perspective in Sub-Saharan Africa where housing demand is on the rise and therefore offers enormous opportunity for rapid growth for banks. Further areas for research are recommended.

Macroprudential Policies and the Growth of Bank Credit

New bank regulations include macroprudential policies to control bank loan growth. Justified by theory, it is unclear whether these policies will work in practice. We estimate the relationship between macroprudential capital and liquidity controls, supervisory intensity, and loan growth using U.S. bank data while controlling for loan demand and other factors that affect loan growth. We find bank funding costs and supervisory monitoring intensity to be the most important determinants of loan growth followed by loan portfolio performance and bank profitability. Bank capital and liquidity ratios have limited impacts, suggesting that macroprudential regulations are unlikely to be effective.

Loan portfolio performance and El Niño, an intervention analysis

PurposeThis paper illustrates that natural disasters can significantly threaten financial institutions serving the poor. The authors test the case of a microfinance institution (MFI) in Northern Peru, where severe El Niño events create catastrophic flooding.Design/methodology/approachPortfolio‐level, monthly data from January 1994 to October 2008 were examined using an intervention analysis. The paper tested whether the 1997‐1998 El Niño increased problem loans and estimated the magnitude of the effect.FindingsThe results indicate El Niño significantly increased problem loans, specifically the level of restructured loans. While restructured loans averaged 0.5 percent of the total loan portfolio before the El Niño, the estimated cumulative effect of El Niño indicates that an additional 3.6 percent of the portfolio value was restructured due to this event.Research limitations/implicationsFuture research could build on these results by modeling insurance‐type mechanisms for the MFI. Additional research that replicates these analyses in another context would be highly valuable for comparison across natural disasters and financial institutions.Practical implicationsThe findings demonstrate that the correlated risk exposure of many small borrowers can significantly affect the lender and the importance of considering bank management in assessing disaster risk of a financial institution.Social implicationsLender strategies to minimize losses may require long‐term restructuring that perpetuates the effects of the disaster in the community.Originality/valueThis paper may be of particular value to researchers and practitioners hoping to improve the effectiveness and efficiency of MFIs concentrated in regions exposed to natural disaster risk.

Business cycle effects on commercial bank loan portfolio performance in developing economies

This paper studies the effects of business cycles on the performance of commercial bank loan portfolios across major developing economies in the period 1996–2008. We measure loan performance via loan loss provisions (that is, recognized expenses related to expected losses in bank income statements). Our results indicate that while economic growth is the main driver of loan portfolio performance, interest rates have second-order effects. Furthermore, we find the relationship between loan loss provisions and economic growth to be highly non-linear only under extreme economic stress: GDP growth needs to decline by more than 6 percentage points (pp, in absolute terms) in order to generate an increase in loan loss provisions equivalent to median emerging market bank profits; while a decline of more than 10pp in growth implies significant capital losses, of at least 20 percent, for the median emerging market bank. In addition, we find higher loan loss provisions are associated with private sector leverage, poor loan portfolio quality, and lack of banking system penetration and capitalization.

Business Cycle Effects on Commercial Bank Loan Portfolio Performance in Developing Economies

This paper studies the business cycle effects on the performance of commercial bank loan portfolios across major developing economies in the period 1996-2008. We measure loan performance via loan loss provisions (that is, recognized expenses related to expected losses in bank income statements). Our results indicate that while economic growth is the main driver of loan portfolio performance, interest rates have second-order effects. Furthermore, we find the relationship between loan loss provisions and economic growth to be highly non-linear only under extreme economic stress: GDP growth needs to decline by more than 6 percentage points (pp, in absolute terms) in order to generate an increase in loan loss provisions equivalent to the median emerging market bank profitability; while a decline of more than 10 pp in growth implies significant capital losses, of at least 20 percent, for the median emerging market bank. In addition, we find higher loan loss provisions are associated with private sector leverage, poor loan portfolio quality, and lack of banking system penetration and capitalization.

On the Market Discipline of Informationally-Opaque Firms: Evidence from Bank Borrowers in the Federal Funds Market

Using plausibly exogenous variation in demand for federal funds created by daily shocks to reserve balances, we identify the supply curve facing a bank borrower in the inter-bank market, and study how access to overnight credit is affected by changes in public and private measures of borrower creditworthiness. While there is evidence that lenders respond to adverse changes in public information about credit quality by restricting access to the market in a fashion consistent with market discipline, there is also evidence that borrowers are able to respond to adverse changes in private information about credit quality by increasing leverage as if to offset the future impact on earnings. While the responsiveness of investors to public information is comforting, we document evidence which suggests that banks are able to manage the real information content of these disclosures. In particular, public measures of loan portfolio performance have information about future loan chargeoffs, but only in quarters when the bank is examined by supervisors. However, the loan supply curve is not any more sensitive to public disclosures about nonperforming loans in an exam quarter, suggesting that investors are unaware of this information management.