Retail Borrowing Research Articles

Classification of retail loans using decision tree

While there is extensive literature on the prediction of corporate bankruptcies, there is little literature on the classification of retail borrowers. There are several ways to analyse the data, which may yield different results. In this paper, my aim is to predict the default of household loans using decision tree. I found one significant explanatory variable, which was the ratio of the repayment to the contract amount. For my analysis I used two samples with different compositions. Both have high classification accuracy. Overall, the second model is better, with a classification accuracy of 84,4%.

Modern pillories: Overdue debts of the poor

AbstractWe model the consequences of the soft budget constraint in the context of retail borrowers. While János Kornai formulated the term of “soft budget constraint” mainly for organizations (firms, banks, municipalities, NGOs, etc.), we show that it can be applied to individual borrowers as well. We derive the feasibility conditions for private and public debt relief programs in a utilitarian framework and find that lenders have no interest in offering payment reductions if non-performing borrowers are few, have small debts, and are difficult to reach – precisely the characteristics of the poor. In this situation, poor debtors serve better as deterrents, similarly if we put them into a pillory. We calibrate the model parameters to survey data on poor households struggling with overdue debts in small villages in a disadvantaged rural region in Hungary. We find that in normal economic circumstances, private debt relief programs are not feasible. State intervention can be justified by positive externalities and moral considerations.

What If Borrowers Were Informed about Credit Reporting? Two Natural Field Experiments

ABSTRACT Using two natural field experiments, we examine how warning individual retail borrowers that their loan performance will be reported to a public credit registry before and after the loan take-up affects their borrowing behavior. We show that credit warnings reduce default rates by 3.7 to 7 percentage points and increase loan take-up rates by 4.1 percentage points, which suggests that credit warnings benefit both lenders and borrowers. The main drivers appear to be borrowers’ anticipation of a reduction in lenders’ informational rents and improved repayment incentives. Moreover, the reduction in default rates is comparable for borrowers who receive the credit warning before and after the loan take-up. As credit warnings received before but not after a loan take-up can affect the borrower pool, and thus the overall credit risk of the pool, the results suggest that credit warnings have little net effect on the pool’s credit risk due to selection. JEL Classifications: G10; G21; G23.

A risk-neutral approach to the RAROC method of loan pricing using account-level data

PurposeThis paper has used account-level data of corporate and retail borrowers, assessed their credit risk through the risk-neutral principle and examined its implication on loan pricing.Design/methodology/approachIt derives the capital charge and credit risk-premium for expected and unexpected losses through a risk-neutral approach. It estimates the risk-adjusted return on capital as the pricing principle for loans. Using GMM regression, the article has assessed the determinants of risk-based pricing.FindingsIt has been found that risk-premium is not reflected in the current loan pricing policy as per Basel II norms. However, the GMM estimation on RAROC can price risk premium and probability of default, LGD, risk weight, bank beta and capital adequacy, which are the prime determinants of loan pricing. The average RAROC for retail loans is more than that of corporate loans despite the same level of risk capital requirement for both categories of loans. The robustness tests indicate that the RAROC method of loan pricing and its determinants are consistent against the time and type of borrowers.Research limitations/implicationsThe RAROC method of pricing effectively assesses the inherent risk associated with loans. Though the empirical findings are confined to the sample bank, the model can be used for any bank implementing the Basel principle of risk and capital assessments.Practical implicationsThe article has developed and validated the model for estimating RAROC, as per Basel II guidelines, for loan pricing that any bank can use.Social implicationsIt has developed the risk-based loan pricing model for retail and corporate borrowers. It has significant practical utility for banks to manage their risk, reduce their losses and productively utilise the public deposits for societal developments.Originality/valueThe article empirically validated the risk-neutral pricing principle using a unique 1,520 retail and corporate borrowers dataset.

Interest rate fixation periods and reference points

This paper shows how retail borrowers’ focus on recent interest rates as reference points may lead to choices of interest rate fixation periods which are inconsistent with normative predictions. A laboratory experiment reveals that borrowers prefer longer interest rate fixation periods when interest rates have fallen and shorter interest rate fixation periods when interest rates have risen. Normative drivers of interest rate fixation choice related to borrower characteristics, loan attributes, and pricing variables cannot explain these decisions. Market data from a mortgage broker confirms our findings in a context in which sound financial decisions are of prime importance for households’ financial well-being.

Maturity Choice and Reference Points

This paper shows how retail borrowers' focus on recent interest rates as reference points may lead to choices of interest rate fixation periods which are inconsistent with normative predictions. A laboratory experiment reveals that borrowers prefer longer interest rate fixation periods when interest rates have fallen and shorter interest rate fixation periods when interest rates have risen. Normative drivers of interest rate fixation choice related to borrower characteristics, loan attributes, and pricing variables cannot explain these decisions. Market data from a mortgage broker confirms our findings in a context in which sound financial decisions are of prime importance for households’ financial well-being.

The impacts of emotions and personality on borrowers’ abilities to manage their debts

This paper examines the impacts of retail borrowers’ emotions and personality traits on their abilities to engage in appropriate responses when things unexpectedly go wrong and they get into debt repayment difficulties. We establish several scenarios where borrowers are hit with unforeseen circumstances that affect their abilities to make their loan payments and we classify and evaluate the riskiness of the strategies they state that they would adopt in those situations. Via an extensive on-line survey conducted in the UK, we show that borrowers who were most comfortable about taking on debts in the first place, those who show neurotic tendencies, and those who believe that they have control over events rather than being controlled by them, are more likely to undertake high risk strategies when faced with unforeseen issues that affect their ability to meet their debt interest and repayment costs. We also find that respondents who identify as feeling excited, alert or guilty, as well as younger borrowers and those who are single or renters, are more likely to opt for risky approaches. Our findings have potentially important implications for lenders, regulators and debt counselling services regarding the types of people who are most likely to get into debt troubles.

The Impacts of Emotions and Personality on Investors’ Abilities to Manage Their Debts

This paper examines the impacts of retail borrowers’ emotions and personality traits on their abilities to engage in appropriate responses when things unexpectedly go wrong and they get into debt repayment difficulties. We establish several scenarios where borrowers are hit with unforeseen circumstances that affect their abilities to make their loan payments and we classify and evaluate the riskiness of the strategies they state that they would adopt in those situations. Via an extensive on-line survey conducted in the UK, we show that borrowers who were most comfortable about taking on debts in the first place, those who show neurotic tendencies, and those who believe that they have control over events rather than being controlled by them, are more likely to undertake high risk strategies when faced with unforeseen issues that affect their ability to meet their debt interest and repayment costs. We also find that respondents who identify as feeling excited, alert or guilty, as well as younger borrowers and those who are single or renters, are more likely to opt for risky approaches. Our findings have potentially important implications for lenders, regulators and debt counselling services regarding the types of people who are most likely to get into debt troubles.

Banks, Taxes, and Nonbank Competition

This paper models banks’ choice of capital structure and interest rates on loans and deposits when financial services markets are characterized by economies of scope, corporate taxes, and competition from nonbanks (shadow banks). In markets with rich retail lending opportunities but limited retail savings, banks may choose high equity capital (low leverage) when they are not subject to corporate income taxes. When banks are taxed, equity capital declines and retail borrowers bear the tax burden. For the opposite case of markets with few lending opportunities but plentiful retail savings, banks minimize capital and the tax burden falls on depositors. When banks face greater nonbank competition for retail savings, equilibrium loan rates increase, encouraging entry from nonbank lenders. The model’s predictions are consistent with U.S. banks over the last two centuries. Recent empirical research on how taxes affect bank behavior also supports the model.

Young Consumer’s Irrational Motives of Retail Borrowing

The purpose of the research is to investigate young customers’ irrational motives for retail borrowing. In addition, the intention to retail borrowing has also been examined. A convenience sampling method was employed. Self-administered and online survey questionnaires were distributed among 236 university students in Western Australia. The return yielded 171 usable questionnaires, the data from which were analyzed using SPSS 22. The findings support the influence of anomia, thrill-seeking, and status consumption on the attitude toward retail borrowing. In addition, a strong positive relationship between attitude toward retail borrowing and retail borrowing intention has been found. Previous studies have mainly focused on the rational motives of retail borrowing in the UK and USA. This study incorporates the irrational motives into the construct from Australian perspective.

Young consumers and retail borrowing: application of the theory of planned behavior

Retail borrowing entails customers violating retailers' return policies by purchasing goods with the intention of using and then returning them. Our research purpose was to investigate consumer motivations that may underlie their attitude toward retail borrowing and to test the underlying mechanism of borrowing intention by utilizing the theory of planned behavior. Data were collected through an online survey of 276 female undergraduates. Past retail borrowing experience and the perception that retail borrowing had no negative impact on retailers were significantly related to participants' attitude toward retail borrowing. Attitude, subjective norm, and perceived behavioral control contributed significantly to retail borrowing intention, with subjective norm exerting the greatest influence. In addition, two additional paths were tested that significantly improved the explanatory power of the theory of planned behavior and prediction of retail borrowing intention. Implications of these findings concerning retail borrowing behavior are discussed and suggestions for future research are provided.

A Comparative Study of the Borrower Perception of Retail Lending in Private and Public Sector Banks in India

Indian banking sector is growing rapidly and is expected to enjoy even better growth opportunities in the evolving future. Retail banking has always been prevalent in various forms ever since the evolution of banking. Retail lending in India is becoming an important segment of bank credit. It holds the key to the inclusive, comprehensive and pervasive growth of India. India's retail-banking assets size is expected to grow at the rate of 18% a year over the next four years (2006-2010). Customer service is perhaps the most important dimension of retail banking. While most public sector banks offer the same range of service with similar technology/expertise, the level of customer service matters the most in bringing in more business. Perhaps more than the efficiency of service, the approach and attitude towards customers will make the difference. Customer relationship is the base on which the structure of retail banking will evolve. The study brings out the perception of the retail borrowers about the two types of banks in India i.e. the private sector banks and public sector banks. It has revealed that all the TWELVE components of the borrower perception on retail lending can be grouped under TWO broad factors namely; Services and Marketing of loan products and Economic value and convenience. Private Banks are found to be comparatively better in Services and Marketing of loan products and Public Banks in Economic value and convenience among the perception of the borrowers of retail lending. Further, the study elucidates that though there is a positive perception about the retail lending of both the types of banks, these banks need to perk up their services greatly and make conscious effort to meet the customer needs and requirements in the wake of competition and growing expectations of customers.

Stress-Testing Credit Risk Parameters: An Application to Retail Loan Portfolios

Financial institutions are faced with the challenge to forecast future credit portfolio losses. It is common practice to focus on portfolio models consisting of a limited set of parameters, such as the probability of default, asset correlation, loss given default or exposure at default. A simple portfolio model is also used in the Basel II framework for calculating regulatory capital. With regard to the stability of the financial system, these models have to be approved by regulators who have an interest in a conservative assessment of the credit portfolio risk and require the stress-testing of risk estimates. The present paper is the first in its kind to develop a framework to stress the smallest building block, the sensitivities of risk drivers and therefore any derivative such as a risk parameter or the credit portfolio loss. As a result, estimation uncertainties as well as the correlations are taken into account. In an empirical analysis, the stress scenarios for different loan categories are analyzed for US retail borrowers and the implications on economic as well as regulatory capital explored.

Retail Instruments in Public Funding Strategies

Retail borrowing programmes are one component of government debt issuance in both OECD and non-OECD countries. These programmes take a variety of forms and often exist to satisfy a number of objectives. In some jurisdictions, they play a significant funding role. Even in countries where retail borrowing programmes play a small role, they are in many cases politically important because they satisfy primarily social objectives. In recent years, some OECD countries have begun to reconsider their retail borrowing programmes. Shrinking borrowing requirements in a number of countries have led to priority being put on maintaining liquid wholesale markets. Other countries continue to see benefits from their retail borrowing programmes and use them as a significant and stable source of funding. These governments are often innovative at finding ways to drive down administration costs, such as through the use of new electronic distribution channels and total dematerialisation of securities.

Stress-testing credit risk parameters: an application to retail loan portfolios

Financial institutions are faced with the challenge to forecast future credit portfolio losses. It is common practice to focus on portfolio models consisting of a limited set of parameters, such as the probability of default, asset correlation, loss given default or exposure at default. A simple portfolio model is also used in the Basel II framework for calculating regulatory cap­ ital. With regard to the stability of the financial system, these models have to be approved by regulators who have an interest in a conservative assessment of the credit portfolio risk and require the stress-testing of risk estimates. The present paper is the first in its kind to develop a framework to stress the smallest build­ ing block, the sensitivities of risk drivers and therefore any derivative such as a risk parameter or the credit portfolio loss. As a result, estimation uncertainties as well as the correlations are taken into account. In an empirical analysis, the stress scenarios for different loan categories are analyzed for US retail borrowers and the implications on economic as well as regulatory capital explored.

Stress-Testing Credit Risk Parameters - An Application to Retail Loan Portfolios

Financial institutions are faced with the challenge to forecast future credit portfolio losses. It is common practice to focus on portfolio models consisting of a limited set of parameters, such as the probability of default, asset correlation, loss given default or exposure at default. A simple portfolio model is also used in the Basel II framework for calculating regulatory capital. With regard to the stability of the financial system, these models have to be approved by regulators who have an interest in a conservative assessment of the credit portfolio risk and require the stress-testing of risk estimates. The present paper is the first in its kind to develop a framework to stress the smallest building block, the sensitivities of risk drivers and therefore any derivative such as a risk parameter or the credit portfolio loss. As a result, estimation uncertainties as well as the correlations are taken into account. In an empirical analysis, the stress scenarios for different loan categories are analyzed for US retail borrowers and the implications on economic as well as regulatory capital explored.

Retail borrowing: definition and retailing implications

This research defines and explores the pervasiveness of temporary merchandise purchase and use. The findings from a survey of 310 consumers suggest retail borrowing is quite common, especially with clothing items. Subjects provided a significant range of motivations and explanations for their practice of the behavior. Implications are suggested and we develop organizational ability to maintain or improve consumers’ and society's well being.

Retail borrowing: insights and implications on returning used merchandise

Defines a particular form of returned purchases and explores its pervasiveness. Consumers who engage in “retail borrowing” purchase items with the deliberate intention to return such items once they have been used satisfactorily. To facilitate the purchases of good and to act responsibly when purchased items may be defective retailers have extended generous return policies to consumers. Increasingly however some consumers have taken advantage of such policies to “borrow” needed items from retailers. Provides an insight into retail borrowing and the type of most commonly “borrowed” products. Also identifies reasons that trigger the willingness to “borrow” from retailers and discuss the emotions and thoughts that accompany the behavior. Discusses the managerial and social perspectives of the phenomenon.