Loan Quality Research Articles

Pemilihan Metode Predictive Analytics dengan Machine Learning untuk Analisis dan Strategi Peningkatan Kualitas Kredit Perbankan

<p align="justify">As a factor that determines bank’s profitability, loan quality, that is categorized based on debtor’s collectability classification, always gets attention and become main analysis topic in banking industry. Through recent development of statistics and data science, especially in predictive analytics using machine learning techniques, more comprehensive analysis and prediction in loan quality can be conducted. This research is intended to give example on application of predictive analytics using machine learning technique for analysis and strategy recommendation in increasing bank’s loan quality improvement. In this research, some machine learning classification methods are compared to conduct predictive analytics in loan quality with big data size (big data analytics). Computation result of different methods are compared and summarized, resulted in recommendation on most appropriate method to achieve this research objective. This research concluded that for imbalanced big data size such as bank’s loan collectability, Tree Ensemble method, further development of Decision Tree method that is commonly used in machine learning, is one of appropriate methods to get satisfactory result in this research. Imbalanced data that can result in false positive may be overcame by oversampling Synthetic Minority Oversampling Technique (SMOTE). This research scope is limited to analysis and prediction of debtor’s collectability for the next several months, combined with analysis and strategy recommendations based on product type, gender, and debtor’s occupation. Further predictive analytics for the next several years by including external factors, such as economic growth, is not covered in this research and possible to be conducted. As machine learning application in Indonesian banking industry analysis is still in early phase, this research is expected to become one of reference in application of predictive analytics using machine learning in banking industry. </p><p><strong>Keywords</strong><strong>: </strong>predictive analytics; machine learning; loan collectability; loan quality</p>

Factors Affecting Loan Loss Provisions during the Covid-19 Pandemic – The Case of Commercial Banks in Vietnam

Credit is considered a crucial activity of commercial banks; it accounts for the most significant proportion of the bank's total assets and is also an activity that carries great risks. The study uses OLS, FEM, REM, and FGLS to assess the factors affecting loan loss provisions (LLPs) of 20 Vietnamese commercial banks during the Covid-19 pandemic from Q1/2020 to Q4/2021. The result of the model is based on FGLS to overcome the phenomenon of heteroscedasticity after using estimation by OLS, FEM, REM, showing that the factors affecting LLP of Vietnamese commercial banks during the Covid pandemic include: bank size (SIZE), non-performing loans ratio (NPL), a ratio of pre-tax profit and provision to total assets (CROA), loans to total assets ratio (LOAN), and credit growth (ΔCREDIT). Research results using the FGLS method show that bank size, bad debt ratio, pre-tax profit ratio and provision to total assets and credit growth positively impact the LLP of the Vietnamese commercial banks in the Covid pandemic. However, interestingly, the percentage of loans to total assets can decrease the provision for loan losses. Thereby, the study proposes some policy implications as follows: The SBV needs to have the policy to limit credit growth and bad debt ratio for commercial banks to control the competition for a market share of loans without ensuring the quality of loans, leading to an increase in credit risk and LLP. Furthermore, each Vietnamese commercial bank needs to develop and apply a practical and comprehensive credit process to ensure debt recovery to avoid a lot of bad debts. For new customers, banks need to fully assess all aspects to predict the level of risk before deciding to provide loans. Additionally, the long-term effects of Covid-19 cause difficulties for commercial banks' activities, SBV needs to consider supportive policies through interest rate reduction, grace period, and debt extension to increase financial performance and maintain market share and profits of commercial banks.

Liquidity and Discipline. Bank due Diligence Over the Business Cycle

AbstractThe quality of bank lending is increasingly viewed as a force driving the buildup and unfolding of crises. In a dynamic general equilibrium model, we show that banks’ access to liquidity and the values of loan portfolios govern banks’ incentives and effectiveness in producing information on loans. Consistent with granular loan-level evidence from US banks, the calibrated model predicts that loan due diligence deteriorates during expansions and intensifies during contractions. This countercyclicality attenuates investment and output effects of liquidity shocks but can moderately amplify loan quality shocks. Credit policies may dilute stabilizing effects of due diligence.

How does firm prestige affect the cost of bank loans?

Firm prestige reduces the cost of bank loans. Specifically, when borrowers are included in Fortune’s list of ‘America’s Most Admired Companies' (MAC), their loan costs decline by approximately 12.3 bps on average. The effect appears causal. The negative relation between prestige and loan costs is more pronounced for borrowers in more competitive industries and with higher information uncertainty. Banks with weaker bargaining power offer favorable loan terms to the MAC ranked borrowers when they face a high degree of competition from other banks. The MAC ranking appears to be used by these banks as a summary statistic for loan quality in the face of competition.

Deposit insurance and credit union lending

We exploit an exogenous change in the coverage of insured deposits following the passage of the Emergency Economic Stabilization Act (2008) to investigate the impact of deposit insurance on the volume, composition and quality of credit union lending. Using a difference-in-difference approach, we find changes in the volume, composition and riskiness of credit union lending. Specifically, we find that affected credit unions increase total and unsecured lending, leading to a decline in loan quality. Overall, our results suggest that an increase in the maximum coverage of insured deposits induces credit unions to lend more at the expense of loan quality.

Private mortgage securitization and loss given default

AbstractLoan performance varies by default probability and loss given default (LGD). While the relationship between securitization and default probability has been studied intensively, the effect of securitization on LGD remains unexplored. Using a unique data set containing over 40,000 mortgage liquidations, this article studies the effect of private securitization on LGD. We document that securitized loans incur higher LGD than observably similar portfolio loans. The results indicate that the effect comes mainly from the difference in loan quality between securitized and portfolio loans. Securitized opaque mortgages incur more than 18% (in relative terms) higher loan losses than observably similar portfolio loans. In addition, a difference‐in‐difference analysis provides evidence that precrisis securitization standards contributed to higher loan losses.

Factors Influencing the Decision to Practice Medicine in West Virginia: Findings from a Statewide Survey of Physicians

Introduction The purpose of the study was to identify factors that influence the decision to practice medicine in West Virginia (WV) and to identify state-specific targets to address workforce issues. Methods A cross-sectional study was conducted between November 2019 and March 2020 using an online link to an anonymous survey sent to all physicians with a e-mail address on file with the state allopathic medical licensing board and the WV Osteopathic Medical Association. Descriptive statistics and inductive analyses were employed. Results Forty-five percent of respondents were from WV, and 17% were from rural WV in the sample size of 428. Quality of life and loan forgiveness/repayment were more important to primary care than specialty care providers. Community attributes were important to native West Virginians. Recruitment and retention themes that emerged were as follows: home and family, the capacity to dually serve as faculty and clinician, to serve where most needed, debt payback, and quality of life. Discussion Quality of life and community attributes were the most influential factors in deciding to practice medicine in WV. Financial incentives were effective recruitment tools. Retention was strongly influenced by social and reimbursement policy in the state, clinical leadership at the local level, and lifestyle factors in the geographic region. Conclusion Enhancing relationships and coordinating programs across sectors to provide targeted recruitment, addressing socioeconomic and public health issues, and periodically evaluating physician satisfaction may be leverage points for physician recruitment and retention in WV.

Going the Extra Mile: Distant Lending and Credit Cycles

ABSTRACTThe average distance of U.S. banks from their small corporate borrowers increased before the global financial crisis, especially for banks in competitive counties. Small distant loans are harder to make, so loan quality deteriorated. Surprisingly, such lending intensified as the Fed raised interest rates from 2004. Why? We show that banks' responses to higher rates led bank deposits to shift into competitive counties. Short‐horizon bank management recycled these inflows into risky loans to distant uncompetitive counties. Thus, rate hikes, competition, and managerial short‐termism explain why inflows “burned a hole” in banks' pockets and, more generally, increased risky lending.

Micro-Prudential Regulation and Loan Monitoring

We evaluate the value of loan monitoring systems for a bank controlled by a micro-prudential regulator. We investigate dynamic systems (an information channel that generates information flow about quality) and static systems (where the lender receives a single signal about loan quality). We find that dynamic systems carry a regulatory charge that dominates the benefit of the systems and are therefore unprofitable, whereas static systems have positive value. Specifically, lenders can profitably dismantle their dynamic systems and instead turn to static monitoring systems. The model reveals, therefore, a potential weakness of micro-prudential regulation.

The financial and prudential performance of Chinese banks and Fintech lenders in the era of digitalization

The years 2013 to 2019 marked an explosion in Fintech in China. We analyze the financial and prudential performance of 40 exchange-traded banks and 25 listed Fintech lenders in China during this watershed period. Among other things, traditional banks experienced rising operating costs, declining profit margins and softening loan quality. Consistent with a process of adaptation, traditional bank performance stabilized in the latter part of the study period (2018-19) after an initial period of decline. Study findings also highlight rising business and regulatory costs for Fintech providers over the course of the study frame. A marked deterioration in online lenders’ Special Mention and Non-Performing Loan (SML & NPL) positions arose during the period. Within the traditional bank group, smaller entities with fewer growth options and greater foreign ownership fared worst in prudential terms. Traditional banks’ financial and prudential performance also declines with time since IPO. Relative to joint stock commercial, city and rural banks, state-owned lenders registered more resilient performance, especially in relation to asset quality. In a final area, we construct a categorical Fintech proficiency variable for China's established banks. Our preliminary evidence suggests such proficiencies help stabilize SML and NPL rates and support financial returns. Overall, we offer major contribution to the banking literature by analyzing the financial and prudential performance of both incumbent and emerging lenders in one of the world’s most dynamic Fintech settings.

Does nonperforming loan securitization affect credit default swap spreads? Evidence from European banks

AbstractWe contribute to the growing literature on bank risk management by examining the credit risk implications of nonperforming loan (NPL) management during the period 2012–2020. We construct a unique database with 116 NPL deals by 31 European Union (EU) banks. Our study is motivated by the hypothesis that NPL securitization has a beneficial effect on bank loan quality and that this effect is incorporated in the bank's credit default swap (CDS) spread. Our analysis finds a statistically significant decline in a bank's CDS spread in the days leading up to and shortly after the announcement of an NPL securitization. This suggests that the CDS market views NPL securitization as a de‐risking activity and a means of risk mitigation. The impact is even more evident for NPL securitization with a government guarantee which may offer additional credibility to these de‐risking activities.

Judgments about the Quality of Loans and Loan Originators under Expected versus Incurred Loss Accounting

Judgments about the Quality of Loans and Loan Originators under Expected versus Incurred Loss Accounting

Uncertainty and bank funding liquidity risk in Vietnam

This paper examines the impact of uncertainty on bank funding liquidity risk. Based on a sample of Vietnamese commercial banks from 2007 to 2019, we show evidence that micro uncertainty in the banking sector leads to higher funding liquidity risk, as proxied by lower deposit ratios. Additional analyses reveal that this nexus widely depends on bank heterogeneity. More precisely, various bank-specific forces that improve banks? financial strength (i.e., an increase in bank return, loan quality, capitalization, liquid assets, and bank size) tend to mitigate the adverse impact of uncertainty on bank funding liquidity risk. Our findings are robust to changes in multiple combinations of regressors, different key bank-level variables to calculate the dispersion of shocks as banking uncertainty measures, and alternative econometric approaches.

ПРОБЛЕМИ РИНКУ КРЕДИТУВАННЯ УКРАЇНИ В УМОВАХ ВОЄННОГО СТАНУ

Before the start of russia's large-scale invasion the demand for loans in Ukraine was caused by: the improvement of the macroeconomic situation in the country, a decrease in interest rates and gov-ernment programs to support entrepreneurship and mortgage lending. The insolvency of debtors dur-ing the war led to an increase in the volume of overdue loans and, as a result, a deterioration in the quality of banks' loan portfolios.The article systematizes the problems of the lending market that arose due to the military ac-tions in Ukraine, determines the priority of the introduction of anti-crisis measures to satisfy both the interests of creditors and borrowers.We have identified a number of factors that have worsened the quality of banks' loan portfolios and the creditworthiness of borrowers who have issued loans in recent years. In the article were stud-ied the reasons for the increase in the cost of new loans and the decrease in demand for them. Measures of the loan market regulator to ease requirements for banks in the credit risk management system have been systematized. The content and priority of the introduction of anti-crisis measures to settle the interests of lenders and borrowers were determined, state programs and grants to support business lending for the recovery of Ukraine were analyzed.Іt was concluded that the banking system of Ukraine has enough liquid funds for lending, but the lending market is experiencing the painful consequences of the state of war: high risks associated with the war increased theprice of credit funds; the quality of banks' loan portfolios deteriorated due to the low solvency of borrowers, credit risk reduced the profitability of banking activities; the demand for new loans fell sharply due to the shutdown of certain businesses, disruption of logistics, migration of employees of business structures; part of the collateral for bank loans (including mortgages) has been destroyed and it is still not solved what the mechanism of compensation for losses should be for banks.

Macroeconomic and Bank Specific Determinants of Non-performing Loans in Ghanaian Banking Sector

Banks play an important role in the creation of capital for economic growth of a nation and their reliability is very critical for financial system stability. Nevertheless, banks face risks such as credit risk, which seem to have an impact on banks profitability. To determine credit risk, the ratio of Non-Performing Loans (NPLs) to total bank loans is the most common indicator used. Non-Performing Loans are loans that do not produce interest and principal amount for a minimum of 90 days and fundamentally reflects the performance of a bank. A high ratio indicates a greater risk of loss while a small ratio presents a low risk to the bank. NPLs systematically affects the whole banking system and if care is not taken will disturb its future development. The study examined the determinants of NPLs in the banking industry of Ghana using bank specific and macroeconomic variables. The study was based on monthly data covering the period January 2007 to December 2019 and employed the ARDL bounds test of co-integration to estimate the evidence of short run and long run relationship among the variables. The study results revealed that, bank’s lending rate, bank’s profitability, Cost to Income Ratio, Capital Adequacy Ratio and Net Interest Margin are the bank specific factors influencing non-performing loans. At the macroeconomic level, inflation and economic growth reduces non-performing loans. Furthermore, previous year’s non-performing loans and net interest margin depresses Current NPLs whereas credit adequacy ratio promotes Current NPLs in the short-run. The study recommends a firm policy reform that pays attention to credit appraisal mechanisms to improve the quality of bank loan portfolios through tougher regulations and guidelines to support healthier investment. Thus, management of banks should do well to cut interest rate on loans to make them less expensive for borrower’s to meet their commitments, whiles regulators undertake policies that can ensure efficiency in bank’s operations. Furthermore, Policymakers must consider GDP growth carefully by implementing a set of policies geared towards improving investment and finally profitability.

ОЦІНКА ЕФЕКТИВНОСТІ УПРАВЛІННЯ КРЕДИТНИМ ПОРТФЕЛЕМ БАНКУ: ТЕОРІЯ ТА ПРАКТИКА

The stability and profitability of a commercial bank directly depends on the quality organization of credit services. At the same time, it is important to explore the methodological tools for assessing the effectiveness of loan portfolio management, which will allow banking institutions to make timely management decisions regarding the formation of the optimal loan portfolio. The article describes the methodological approaches to assessing the effectiveness of credit portfolio management of a commercial bank. The most common methodological approaches, methods and indicators for determining the effectiveness of the bank's loan portfolio management are systematized. The general efficiency of management of banking institution on the basis of the analysis of the basic financial and economic indicators of activity of commercial bank is defined. The profitability of the bank's activity, the growth of cash and cash equivalents on accounts, the increase in the bank's loan portfolio and the expansion of the customer base for the period under study were established. The dynamics and structure of the loan portfolio of a commercial bank, which is dominated by consumer lending to individuals, which is the largest profitable segment of banking, has been studied. An assessment of compliance by a commercial bank with credit risk standards set by the National Bank of Ukraine was performed. The coefficient method is used to assess the effectiveness of the loan portfolio. Indicators of credit portfolio management efficiency have been studied: credit activity ratio; the share of the loan portfolio in total liabilities; equity coverage ratio of the loan portfolio; loan portfolio growth rate; the share of non-performing loans in the loan portfolio; loan portfolio hedging ratio; credit risk coverage ratio; the share of quality loans in the loan portfolio; the share of written-off loans in the loan portfolio; loan portfolio profitability indicator. The results of the calculation of some of these indicators indicate a decrease in the quality of the bank's loan portfolio. Based on the calculation of financial ratios, the directions of optimization of the loan portfolio of a commercial bank are identified.

Ownership complexity and loan quality: Evidence for listed commercial banks in Vietnam

This paper examines the relationship among aspects of bank ownership complexity, including ownership dispersion and type, and the quality of bank loan portfolio. The data used for analysis is an unbalanced panel consisting of 13 listed commercial banks in Vietnam for the period of 2010 - 2019. The non-performing loan (NPL) ratio is used as an indicator of loan quality. The results showed that ownership dispersion, calculation based on the Herfindahl–Hirschman Index of large shareholding, improves the loan quality. Foreign ownership is also found to have positive impact on the loan quality. However, there is no relationship established between government ownership and loan quality.

Overview of the current state of consumer lending in commercial banks of Ukraine and its organizational and economic support

The paper gives the theoretical basis of the peculiarities of the process of consumer lending in commercial banks – defines the economic essence of consumer credit, its objects, tools, stages of implementation and mechanisms for repayment of credit debt. An overview of the current state and development of bank consumer lending in Ukraine is presented. An analysis of the dynamics of assets and loan portfolio of Ukrainian banks, namely: analysis of loans to individuals and analysis of the volume and share of consumer loans in the total loans to individuals in the loan portfolio and assets of banks in 2015–2021. The peculiarities of the formation of the retail loan portfolio of Ukrainian banks are studied and the directions of improving the level of organizational and economic support of consumer lending of Ukrainian banks are outlined. A necessary condition for ensuring the stability of the banking system is the development of bank lending. Constant changes in the market of banking services and openness to the external environment require banks to constantly search for markets and lending mechanisms, including consumer credit. It is the development of consumer lending that determines the formation and increase of effective demand of the population, and thus the development of the economy as a whole. Therefore, the intensification of long-term bank lending available to borrowers is one of the most important tasks of Ukraine's strategic development. In recent years, there has been a growth trend in the consumer lending sector, which, on the one hand, has become an indicator of intensification of banks' lending, but on the other hand, rapid growth in retail lending has led to increased debt and unprofitable individual banks. Therefore, there is an objective need to increase the level of organizational and economic support for consumer lending to Ukrainian banks in order to avoid credit risk. An important way to increase the profitability of consumer lending is to improve the quality of loans. To this end, it is recommended to improve the work of the bank's departments for monitoring problem loans, the use of scoring systems, the introduction of insurance of financial risks of banks on card lending.

The evolution of bank revenue and risk in the Asia-Pacific Region

We model the simultaneous determination of bank non-interest income and net interest income while considering bank risk, capital holdings and regulatory quality. Declines in net-interest income are associated with increased non-interest income. In contrast, net interest income shows negligible sensitivity to changes in non-interest income. Increased non-interest income is associated with increased capital holdings after the GFC (with no evidence of volatility increasing regulatory arbitrage). Non-interest income is associated with worsening loan quality. Thus, bank conglomeration does not reduce information asymmetry in the loan portfolio. We establish that the Chinese banking system did not adjust its revenue mix in the same manner as other banks in our regional sample. We argue that increased non-interest income should result in increased prudential surveillance by national regulatory authorities, with a particular focus on loan quality.

Ownership structure and loan quality of deposit money banks in Nigeria

Purpose - This study examined the effect of Ownership Structure (Management Shareholding and Ownership Concentration) on the loan quality (LDR) of banks in Nigeria for a period of 10 years (2008-2017). The study utilized data extracted from the annual reports of the fourteen (14) studied banks.Method - Robustness tests were carried out to determine: the existence or otherwise of multi-collinearity, fitness of the model and appropriate regression analysis for the study. Descriptive statistics, correlation and Fixed Effect GLS regression were used to describe and analyze the data.Result - The study found that, ownership structure (ownership concentration and management shareholding) has significant negative effect on loan quality of banks in Nigeria.Implication - The implications of this research is that increased ownership concentration as well as management shareholding can strengthen banks’ loan quality owing to reduced proportion of depositors funds used to finance loan. This could spur confidence in the bank by the general public with regards to the safety of their deposits.Originality - This study is different from other studies that concentrated on the use of ownership structure in relations to various financial performance measurements such as ROA, ROE, NPM among other. In this study, effort was made to consider the financial health of banks owing to the nature of their business (loan).