Probability Of Repayment Research Articles

Monetary shocks and central bank liquidity with credit market imperfections

This paper analyses the transmission process of monetary policy in a closed-economy New Keynesian model with monopoly banking and a cost channel. The loan rate depends on the repayment probability, which in turn depends on firms' net worth and cyclical output. The supply of bank loans is perfectly elastic at the prevailing loan rate and so is the provision of central bank liquidity at the policy rate. Numerical simulations, based on an illustrative calibration, show that credit market imperfections and sluggish adjustment of bank deposit rates may impart a substantial degree of persistence in the response of output and inflation to monetary shocks. With flexible wages, a relatively high elasticity of the repayment probability with respect to cyclical output is required for a monetary contraction to lead to higher inflation, that is, to a price puzzle. Copyright 2012 Oxford University Press 2011 All rights reserved, Oxford University Press.

Risk-matching behavior in microcredit group formation: evidence from northern Ethiopia

Theoretical models on group lending assume the formation of groups of homogenous risk types. Recent theoretical and empirical findings challenge this view arguing that when markets for insurance are missing, risk homogeneity may not hold any more and risk heterogeneity can be the optimal outcome. Using data from an MFI in Tigray (Ethiopia), this article examines the homogeneity hypothesis and reflects on implications for repayment. No evidence is found that supports risk homogeneity, even accounting for matching frictions. However, we also do not find an explicit link between the presence of risk heterogeneity and side-payments due to missing insurance as suggested in the literature. Instead, other trust-based social networks seem to underlie heterogeneity. Such social networks are often synchronized with credit groups and influence the probability of repayment under heterogeneity. The implication is that successful repayment rates in group lending need not arise only under risk homogeneity but can also arise under risk heterogeneity. Heterogeneity may also serve to bridge missing insurance markets in poor rural environments. MFIs therefore need to consider such local conditions when designing their lending schemes.

Group lending and self-help groups: joint benefit as an alternative governance mechanism

Lending to the rural poor in developing economies, although crucial from the perspective of poverty management, is often subjected to severe informational problems. The literature on group lending with joint liability attempts to resolve these problems by making failure more costly for the borrowers. We take a different approach. In a model of lending with moral hazard, we show that rewarding group success by promising a joint benefit can be used as an alternative mechanism to solve informational problems. We also show that, unlike joint liabilitymechanism, this joint-benefit mechanism would ensure higher repayment probability even in the absence of peer-monitoring. Moreover, in this model, the optimal group size can be endogenously determined.

Credit worthiness of rural borrowers of Pakistan

The paper attempts to provide baseline estimates of probability of repayment from borrowers belonging to rural sector in Pakistan. The paper highlights some of the problems that lender face in a world of uncertainty since there is always possibility of non-repayment by a borrower. Using information on 224 rural households, a detailed description of estimation results is provided. The main findings indicate that collateral should be based on potential credit worthiness of borrowers, elimination of credit subsidies and no new loan facility to previous loan defaulters.

Sample selection bias in credit scoring models

One of the aims of credit scoring models is to predict the probability of repayment of any applicant and yet such models are usually parameterised using a sample of accepted applicants only. This may lead to biased estimates of the parameters. In this paper we examine two issues. First, we compare the classification accuracy of a model based only on accepted applicants, relative to one based on a sample of all applicants. We find only a minimal difference, given the cutoff scores for the old model used by the data supplier. Using a simulated model we examine the predictive performance of models estimated from bands of applicants, ranked by predicted creditworthiness. We find that the lower the risk band of the training sample, the less accurate the predictions for all applicants. We also find that the lower the risk band of the training sample, the greater the overestimate of the true performance of the model, when tested on a sample of applicants within the same risk band — as a financial institution would do. The overestimation may be very large. Second, we examine the predictive accuracy of a bivariate probit model with selection (BVP). This parameterises the accept–reject model allowing for (unknown) omitted variables to be correlated with those of the original good–bad model. The BVP model may improve accuracy if the loan officer has overridden a scoring rule. We find that a small improvement when using the BVP model is sometimes possible.

Emerging Markets Contagion: Evidence and Theory

Using secondary market debt prices and country credit ratings, this paper provides evidence of contagion in emerging markets. It shows that fundamentals are unable to explain the cross-country comovement of creditworthiness in Latin American countries. It also shows that contagion cannot be explained by big news events, such as Brady announcements, and that it is asymmetric, being stronger for negative innovations in creditworthiness. In contrast, in a control group composed of US corporate bond prices and credit ratings of a group of medium size OECD countries, fundamentals explain all the observed correlation. The paper presents a simple model trying to explain this puzzle. It combines illiquid countries with investors who potentially need liquidity in order to change their portfolio. The basic intuition is that if investors require liquidity and they do not find it in one country, then they will seek funds in a second country. Under two alternative equilibrium definitions, the model shows that the probability of repayment of one country is negatively affected by the degree of illiquidity of other countries--an apparently country-specific characteristic.

An expository model of credit rationing

This paper presents a simple exposition of the main results behind more complicated credit rationing models. It uses a standard, static model of the banking firm to analyze the effects of changing the interest rate on loans and the probability of repayment. Using simple elasticity arguments we demonstrate how “natural” credit rationing can arise.

Sequential Banking

We study environments in which agents may borrow sequentially from more than one lender. Although debt is prioritized, additional lending imposes an externality on prior debt because, with moral hazard, the probability of repayment of prior loans decreases. Equilibrium interest rates are higher than they would be if borrowers could commit to borrow from at most one bank. Even though the loan terms are less favorable than they would be under commitment, the indebtedness of borrowers is greater. Further, additional lending causes the probability of default to increase. The results apply to markets for consumer, corporate, and international debt.

An empirical Bayes procedure for the credit granting decision

The use of a simple Stein-rule method is discussed for estimating the repayment probability of a new credit applicant. It is argued that this type of procedure could provide a superior algorithm when a multiperiod view of repayments is taken and when there is a desire to balance the categorised estimate from the common discriminant scoring procedure with a fairer reflection of the applicant's actual performance.

Submarginal Credit Risk Classification

Installment credit grantors require a method of distinguishing delinquent borrowers from whom an extension will be likely to result in repayment of the loans from those for whom the probability of repayment is too low to warrant further expenditure and against whom additional collection efforts would be unprofitable. A method evolved from the techniques utilized in the Marginal Credit Risk Study in the attempt to distinguish personal bankrupts, who in filing bankruptcy could be presumed to express the intent to not repay, from petitioners filing under Chapter XIII of the Bankruptcy Act and debt counselees who, under both plans, voluntarily enter programs for the repayment of their debts.