Loan Portfolio Research Articles

Examining the Impact of Loan Diversification Policy on the Operational Efficiency of Bank of Kigali and Ecobank Rwanda

To mitigate overall loan portfolio risk, commercial banks often turn to diversification strategies. However, the impact of such diversification remains contested among scholars. This study delved into the analysis of the Loan Diversification Policy's influence on the efficiency of Bank of Kigali and Ecobank Rwanda. Employing a mixed-methods approach— both qualitative and quantitative—the study encompassed 191 employees, with a sample size of 66 managers. Data collection utilized questionnaires and annual reports from the banks. Cronbach’s Alpha measured internal tool consistency, yielding a coefficient of 0.861. Analysis involved descriptive and correlational statistics, executed through Statistical Package for Social Sciences (SPSS), with findings presented via charts and tables. Regarding the first objective, among 66 respondents, reasons for risk in the loan portfolio varied: competition among banks (15.2%), global financial crisis (13.6%), currency fluctuation (9.1%), high lending rates (15.2%), loan recovery issues (13.6%), new regulations (12.1%), government policies (9.1%), and declining interest margins (12.1%). Concerning the second objective, factors influencing bank efficiency included education levels (16.7%), experience (22.7%), participation in education programs (19.7%), professional organization memberships (18.2%), training methods (21.2%), and supervision quality (1.5%). Regarding the third objective, the study revealed a significant correlation (99.3%) between the loan diversification policy and commercial bank efficiency, indicating a strong positive relationship. Keywords: Commercial banks, Loan portfolio, Diversification policy, High correlation, Management of banking institutions

COMPARATIVE ANALYSIS OF THE SUSTAINABILITY OF FINANCIAL PROCESSES IN JSC «UKRSIBBANK» AND JSC «PRIVATBANK» USING METHODS OF MODELING ECONOMIC DYNAMICS

Objective. The objective of the present article is to conduct a comparative analysis of the stability of financial processes in JSC «Ukrsibbank» and JSC «PrivatBank» using methods of modeling economic dynamics. Methods. The following methods were used to analyze the areas of application of economic dynamics modeling methods to compare the stability of financial processes in JSC «Ukrsibbank» and JSC «PrivatBank»: the basics of the mathematical apparatus for the analysis of transient processes, correlation and autocorrelation analysis, the methodology for determining the coefficients of impulse-transitional and transient functions, methods of constructing differential models, Laplace transformation and obtaining transition functions, the basics of mathematics of imaginary quantities, methods of obtaining amplitude-phase and frequency characteristics of the object under study, methods of stability analysis of controlled dynamic processes. Results. According to the results of a comparative analysis of the stability of financial processes in JSC «Ukrsibbank» and JSC «PrivatBank», it was established that the impulse-transitional and transitional functions for JSC «PrivatBank» have a more pronounced oscillatory character, which indicates a greater level of seasonality and cyclicality of financial processes in this particular bank, in addition, it reaches higher absolute values, which indicates a greater effect of the multiplier of investments for obtaining income of this bank. It is substantiated that since the line of the amplitude-phase-frequency characteristic for both banks does not cover the point (-1;0), this indicates the stability of the studied profit-making processes and their ability to self-leveling in the event of random disturbances and force majeure circumstances. On the basis of the schedule of amplitude-phase-frequency characteristic for PrivatBank JSC, it was determined that for this bank there is a certain limit of minimum values, below which the change of the investigated influential variables (the size of the loan portfolio, the total volume of contributions and deposits of individuals) does not affect the change in net profit. For JSC «Ukrsibbank» there is no such limit at any minimum values of the selected influential variables. The expediency of applying the mathematical apparatus of analysis of transient processes (in particular, construction of a differential model, transfer, impulse transient and transient function) for researching the process of obtaining a bank's net profit depending on the dynamic changes of its other financial indicators is substantiated. By constructing the amplitude-phase-frequency characteristic of the simulated transient process of changes in bank profit, the stability of the studied process was assessed and it was determined to what extent the existing dependence between the dynamic states of the net profit indicator is resistant to external disturbances and force majeure circumstances.

Problems and Prospects of Consumer Lending Development in the Russian Federation

In the current situation, the issues of consumer lending development are extremely significant and become especially acute, since their relevance is obvious both for individuals acting as borrowers and banks, acting as the main creditor of the population, and the economy as a whole. With the help of a consumer loan, the population is able to eliminate the time gap between receiving goods (services) and paying for them, thereby satisfying their needs. The growth of consumer demand raises production processes, increasing market volumes, contributing to the development of the economy and improving the well-being of citizens. Consumer lending plays a key role in the activities of many commercial banks, microfinance organizations and consumer cooperatives, allows expanding the customer base, which compensates for credit risk, as well as generating a significant part of their income for these entities. At the same time, the assessment of trends in the consumer lending market demonstrates an increase in problems that need to be solved. Problems of debt burden of the population, high risks of loan portfolios of banks and other creditors (lenders), a dangerous share of overdue debts and a high value of interest rates on consumer loans, insufficient literacy of the population on financial issues - an incomplete list of problems, the solution of which can have a positive result only with a comprehensive approach — the participation of the state, creditors and borrowers. The main purpose of the article is to determine the prospects for the development of consumer lending in Russia, based on an assessment of its current state, identifying problems and ways to solve them.

STRUCTURAL APPROACH TO THE FORMATION OF THE BANK'S INDUSTRIAL LOAN PORTFOLIO ON THE BASIS OF SUSTAINABLE DEVELOPMENT

In bank-centred economies, banks are the leading financial institutions, and therefore the implementation of the principles of sustainable development through the instruments of "green" and "sustainable" finance depends on them. Given the historical links between banks and industrial capital, and the modern role of banks in the development of industrial enterprises, the question of taking into account the principles of sustainable development in bank lending to industrial enterprises as subjects causing catastrophic damage to the environment becomes particularly relevant. The purpose of the article is to provide a methodological substantiation of the peculiarities of taking into account the principles of sustainable development in the formation of a bank's industrial loan portfolio. To achieve this goal, the following tasks were solved: to clarify the criteria for taking into account the principles of sustainable development in the formation of the bank's industrial loan portfolio; to propose a structural approach to the formation of the bank's industrial loan portfolio on the basis of sustainable development. The methodological basis of the study is a synthesis of theoretical and practical research in the field of green and sustainable finance. Practical implications. The results of the study show that it is expedient to deepen the development of sustainable lending to industrial enterprises, since the concept of sustainable development is broader than green financing and includes all aspects of sustainable development – environmental, economic and social. Value/ Originality. The article clarifies scientific approaches to the definition of the concept of "sustainable development", identifies key principles of sustainable development, reveals financial aspects of implementation of the principles of sustainable development in the socio-economic life of society and substantiates the expediency of introducing the principles of sustainable development in bank lending to industrial enterprises. The criteria for taking into account the principles and goals of sustainable development in the formation of the bank's industrial loan portfolio are clarified and a structural approach to the formation of the industrial loan portfolio on the basis of sustainable development is proposed.

Кредитный портфель российского банковского сектора в условиях экономической неопределенности

The article presents the results of the study of the impact of anti-Russian sanctions and uncertainty factors of the economic system on the volume of the loan portfolio and overdue debt, the growth rate of bank assets and loans, the cost of credit risk. A comparative analysis of the growth rates of the loan portfolio of the Russian banking sector for the first half of 2020, 2021 and 2022 was carried out. The. economic effect of the anti-Russian sanctions and structural changes in the economy on the dynamics of problem loans and financial results of the banking sector has been revealed. The growth rate of the loan portfolio is given depending on the form of lending.
 The main factors of credit risk occurrence and methods of its management are determined. As a result of the study, conclusions were formed about the further restoration of the Russian banking system and the prospects for the development of the credit market.

Evaluation of Cooperative Risks in Eastern Visayas: Basis for the Development of Risk Management Manual

This study evaluated the risk exposure of cooperatives in Eastern Visayas as basis for the development of a comprehensive risk management manual. The research provided a detailed overview of cooperative profiles, encompassing factors such as membership, asset size, loan portfolio, savings/deposits, equity, and years of operation. The examination extended to the assessment of risk levels across institutional, financial, operational, and external dimensions. Employing a descriptive survey methodology, the study utilized a validated self-made survey schedule as the primary data-gathering instrument for risk assessment. Data analysis involved the application of statistical measures such as arithmetic mean, Pearson correlation, risk severity matrix, and standard deviation. The sample comprised thirty (30) credit and multi-purpose cooperatives, representing 75% of medium and large cooperatives in Leyte, Southern Leyte, Biliran, and Samar provinces. Results indicated an overall low risk level for cooperatives in the institutional, financial, operational, and external dimensions. Particularly, the financial aspect exhibited the highest mean score compared to other risk categories. Factors like the number of members, asset size, loan portfolio, and equity demonstrated significant correlations with identified risks, except for members' savings deposits and years of existence. The study highlighted that the top 5 specific risks carried a combination of high and medium probabilities and impacts. Mitigation strategies, including an internal control system and internal audit, emerged as crucial measures to manage these risks. These strategies were subsequently incorporated into the developed risk management manual, which is recommended for implementation by cooperatives as a proactive measure.

ELPR: A New Measure of Capital Adequacy for Commercial Banks

ABSTRACT We develop and evaluate an accounting-based Loan Portfolio Risk (LPR) variable that captures time-varying contagion effects in default risk for a portfolio of bank loans. Our results show that an Equity-to-LPR ratio (ELPR) is additive in predicting bank failure up to five years in advance, after controlling for all the capital adequacy, asset quality, management experience, earnings, liquidity, and sensitivity to market risks (CAMELS) variables as well as other fundamental-based bank risk measures from prior studies. Further, we find that publicly listed banks with higher ELPR have lower market-implied costs of capital, especially under market stress conditions. We conclude that ELPR captures key aspects of bank risk that are missing in current Basel Committee risk-weighted-asset calculations. JEL Classifications: E32; G14; G21; K23; M41; M48.

Microcredit Risk Management Strategies and Loan Portfolio Quality of Microfinance Institutions in Kenya

The study investigated the effects of Microcredit risk strategies on the loan portfolio quality of microfinance institutions in Kenya. The analysis is based on a panel dataset of 14 microfinance institutions in the period 2017 to 2021. The study was guided by the following theories the institutional theory, the theory of information asymmetry, the theory of delegated monitoring and the modern portfolio. The study will be useful to the MFIs managers and will help them devise good policies to ensure borrowers are well screened to improve portfolio quality while improving the cases of loan defaults. The study adopted a desktop methodology. Desk research refers to secondary data that which can be collected without fieldwork. The quality of loan portfolio has been affected most by nonperforming loans and has affected largely the microfinance institution’s profitability and their financial performances, there have not been adequately featured in any of the studies reviewed. To the academicians and researchers, they will be furnished with relevant information regarding microcredit risk management and loan portfolio quality of the Microfinance institutions in Kenya. This will also contribute to the general body of banking sector and form a basis for further research. The regulators of Bank Sector will use it to formulate stringent policies to tame the rising cases of non-performing loans, evaluating how successive their approach has been identifying the gaps and adjust.

Implementation of Green Banking in the Largest Polish and Romanian Commercial Banks – An Analysis of Progress, Strengths, and Weaknesses

In the context of the Green Deal, which set out to transform Europe into a climate neutral area by 2050, governments and international bodies have shown a growing interest in the financing activities that contribute to this objective. This is because the financial system plays a crucial role in channelling resources towards less polluting technologies. Due to its central place in the financial system, the banking system has obviously taken on the same responsibility. Commercial banks can make a change towards a greener economy through the services they provide (green financial products), their loan portfolio (financing companies with a lower carbon footprint instead of highly polluting ones) and the internal transformation of their own activities (using renewable energies, less paper, etc.). The main aims of this paper are the assessment of the degree of development of green banking in Poland and Romania and the identification of weaknesses and strengths in the following areas: strategy, best examples of ESG (environmental, social governance) practices, ESG rating, methods to calculate and reduce the CO2 emissions, risk management, organization and management of a bank, financing the bank’s activities, credit activities (corporate banking and retail and mortgage banking). Using data from their reports and official websites, we find that steps have been made towards green banking, but progress is meagre, and the process is only in its early stages. This study will be useful to practitioners through the landmarks and set of criteria it proposes, as well as to researchers as a starting point for a deeper analysis of each area of green banking.

Misreporting of second liens in portfolio mortgages and privately securitized mortgages

AbstractUsing a unique nationwide mortgage servicing dataset, this paper investigates the underreporting of second liens in portfolio mortgages and compares underreporting in portfolio versus privately securitized mortgages. Portfolio loans have more than 40% of the second liens underreported. Low documentation securitized loans have a 47% (in relative terms) lower misreporting rate than observably similar portfolio loans. The portfolio setting allows us to provide strong evidence that misreporting happens in the early stages of intermediation by lenders. The decreased occurrence of misreporting in sold loans subjected to more rigorous screening indicates the effectiveness of MBS issuers' screening, though its overall effect remains limited. Further, we show that the lender‐MBS issuer affiliation also plays a role in misreporting.

Функціонування банківської системи України під час війни

The purpose of this article is to outline the financial situation of Ukraine during the ongoing war with Russia and to show the actions of the National Bank of Ukraine to preserve and ensure financial stability in emergency conditions. The article indicates the impact of the war on the financial state of the economy and the banking sector. The state of the Ukrainian economy, as well as the banking sector, as the basis of the financial system, is characterized. Threats and challenges, risks inherent in the activities of financial service providers – banks are indicated, attention is focused on credit risk. Changes in bank balance sheets in terms of assets and liabilities in foreign currency in recent years (2018–2022) were considered, the main reasons for the deterioration of the quality of the loan portfolio and the reasons for the reduction of the loan portfolio were noted. An analysis of non-performing assets of banks and the reasons for their increase was carried out. The reports of the National Bank of Ukraine and the State Statistics Service of Ukraine were used for the analysis. The following priority directions of NBU activity for 2023 have been identified: credit risk and liquidity risk management; capital; maintaining business models and internal management, including ensuring the continuity of operation of bank branches under martial law. The need for global efforts to restore the economy and financial system of Ukraine after the end of the war is substantiated.

The Impact of Monetary Policy on Bank Risk in the Western Balkan Countries

Abstract The objective of this research paper is to examine the impact of monetary policy conditions on bank risk-taking in the Western Balkan countries. The paper tries to identify if monetary policy conditions, especially money interest rates, may induce a greater appetite for bank risk-taking in the Western Balkan countries. The impact of macroeconomic and banking indicators on bank risk-taking will be examined, too. For this purpose, we apply pooled OLS techniques, Fixed and Random effects panel, and Hausman-Taylor Instrumental IV model. The econometric results show a negative correlation between the monetary policy rate and bank risk-taking, rejecting the hypothesis that monetary policy rates indicate bank risk increase. However, expansive credit policies or loan portfolio growth have a positive impact on bank risk-taking in the Western Balkans. The study is original, and its findings will be of value to Central Banks and other policymakers in the Western Balkan countries.

Depicting Risk Profile over Time: A Novel Multiperiod Loan Default Prediction Approach

With the rapid development of fintech, the need for dynamic credit risk evaluation is becoming increasingly important. While previous studies on credit scoring have mostly focused on single-period loan default prediction, we call for a new avenue—multiperiod default prediction (MPDP)—to depict risk profiles over time. To address the challenges raised by MPDP, such as monotonic default probability prediction and complex relationship accommodation, we propose a novel approach, hybrid and collective scoring (HACS). We design a hybrid modeling strategy to predict whether and when a borrower will default separately through a default discrimination model and a default time estimation model, respectively, and synthesize them through a probabilistic framework. To accommodate various possible patterns of default time and measure the distribution of default probability over successive time intervals, we propose a joint default modeling method to train the default time estimation model. Empirical evaluations at the model (time-to-default prediction performance and discrimination performance) and mechanism (identifiability and discriminability) levels, as well as impact analyses at the application (granting performance and profitability performance) level, show that HACS outperforms the benchmarked survival analysis and multilabel learning methods on all fronts. It can more accurately predict time-to-default and provide financial institutions and investors better decision-support in granting loans and selecting loan portfolios.

Catalyzing Socioeconomic Change: Exploring Microfinance's Impact on Poverty Dynamics in Afghanistan

Amidst the challenges of post-conflict reconstruction and poverty reduction, this study delves into the dynamics of microfinance and its potential to catalyze socio-economic change in Afghanistan. With a focus on critical indicators including employment rates, literacy rates, infant mortality rates, and the national poverty headcount ratio, this research examines the nuanced relationship between microfinance and poverty alleviation. Employing a quantitative approach, the study employs regression analyses to unveil the impacts of microfinance engagement indicators on these socio-economic variables. Drawing from a rich collection of secondary data, this research collects four dimensions of microfinance engagement (i.e. number of active borrowers, gross loan portfolio, amount of savings, and number of active savers) and employs them as parameters vis-à-vis the critical indicators. This research conducts a systemic analysis of the empirical evidence and contributes to the understanding of how microfinance interventions can pave the way for a more inclusive and prosperous future for Afghanistan.

THE IMPACT OF SFAS166/167 ON BANK LIQUIDITY AND LENDING

This study examines whether, and to what extent, SFAS166/167 changed the role of securitization in bank liquidity and lending activities. We compare the sensitivity of on-balance sheet loan growth to the loan portfolio liquidity index proposed by Loutskina [( 2011 ) The role of securitization in bank liquidity and funding management, Journal of Financial Economics 100, 663–684] between affected banks and control banks. We find that SFAS166/167 is significantly associated with a reduction in the use of securitization to enhance on-balance sheet liquidity, consistent with the view that consolidation on balance sheets may render the securitization of loans too costly to be considered an effective source of liquidity. In addition, we find that affected banks with the highest increase in liabilities from consolidating Qualified Special Purpose Entities (QSPEs) experienced a significant decrease in lending activities relative to the control banks. This is likely because consolidating former QSPEs may adversely affect the ability and willingness of banks to engage in securitization and issue new loans. Taken together, our results suggest that SFAS166/167, requiring the consolidation of former QSPEs, led to a decline in the role of securitization as a liquidity management tool in banks and to a significant decline in lending.

Climate policy relevant sectors in the Polish commercial banks

The aim of the study is to estimate credit exposures and their changes in commercial banks' portfolios in terms of sectors important for climate policy, which exposes them to the risk of transition in Poland in 2013-2022. The research concerned the analysis of changes in the structure of the loan portfolio in terms of sectors relevant to climate change (CPRS) broken down by groups (green, black, brown, dirty), industries (fossil fuels, utility-electricity, production, manufacturing, transportation, agriculture), and types of activity divided into sections. The CPRS methodology was applied (Battiston), which is used in EiOPA, ECB, EBA. The share of green exposures of the entire banking sector in 2013-2022 increased (to 49%) and the share of dirty exposures decreased (to 51%). Due to the link between the sections, the three pillars of industries with the greatest risk to transformation among the CPRS were: buildings, transportation and manufacturing.

МЕТОДОЛОГИЧЕСКИЕ ОСНОВЫ БАНКОВСКОГО КРЕДИТОВАНИЯ И КЛАССИФИКАЦИИ ФАКТОРОВ, ВЛИЯЮЩИХ НА ОСОБЕННОСТИ ПОЛУЧЕНИЯ КРЕДИТОВ

The article discusses the methodological foundations of bank lending, the essence of bank lending, as well as the systematization of approaches to classifying factors in the process of crediting enterprises, classified as business entities. The factors influencing the lending process are classified. The organization of the lending process in a bank includes several stages, each of which has its own characteristics and is characterized by some intermediate results. Determining the creditworthiness of borrowers and assessing the level of credit risk of the bank when concluding a credit transaction is carried out in the course of credit analysis. The essence of this stage is a comprehensive and comprehensive analysis of the activities of borrowers in order to ensure the desired profitability of lending operations at an accepted level of credit risk and to prevent irretrievable losses. However, changes in external conditions, negative trends in the borrower's activities and possible mistakes by bank employees may lead to a deterioration in the quality of the loan and the loan portfolio as a whole.

The spillover effect of bank distress: Evidence from the takeover of Baoshang Bank in China

The recent US regional banking crisis has gained considerable attention due to its potential for contagion and amplification of shocks. This paper employs the difference-in-differences method to examine the spillover effects of a regional bank failure on its peer institutions. By focusing on the bankruptcy case of Baoshang Bank in China, which serves as a natural experiment, we show that the bank's bankruptcy leads to a substantial increase in the riskiness of its peers’ loan portfolios. Specifically, our findings reveal a more pronounced impact on group-based loans, while digital credit remains unaffected. This study introduces a novel mechanism through which bank distress spillovers, providing valuable insights for financial institutions to optimize their lending strategies and for policymakers to make informed policy and regulatory decisions.

For narrower income inequality: traditional finance or microfinance?

ABSTRACT This paper uses the theory of information imperfections to examine the relationship between income inequality and financial development in a dual financial system comprising traditional finance and microfinance. It uses panel data for 97 developing countries over a period characterized by declining income inequality from 2000 to 2017. Traditional finance is measured through domestic credit relative to GDP and the IMF Financial Development Index. Microfinance is measured through the size of microfinance gross loan portfolio relative to GDP and the number of active microfinance borrowers to the total population. Controlling for various measures of macroeconomic and socioeconomic variables and using different econometric specifications including a random-effects linear regression model with endogenous sample selection, the results show that microfinance consistently predicts a lower income inequality measured by the Gini coefficient, while traditional finance shows no impact. The findings of this paper draw clear policy implications regarding the role of microfinance as a tool for income equality in developing countries.

Bank market power and supervisory enforcement actions

This paper investigates the relationship between supervisory enforcement actions and bank market power. Employing a unique dataset on enforcement actions in Italy from 2006 to 2018, we first document that banks with higher market power are more likely to escape public scrutiny. Further, this effect is more substantial for local banks than commercial ones, coherent with the view that national supervisors are softer when dealing with local banks. Second, when uncovering the main characteristics of the banks with higher market power, we find that banks with higher market power do not outperform other banks in profitability but show a worse loan quality, suggesting that banks with higher market power have riskier loan portfolios than other banks and attract fewer enforcement actions. Our results are robust across several econometric techniques and alternative specifications by contributing to the long-lasting debate on the implications of the bank market power on financial stability, considering the role of enforcement actions.