Lending policies of informal, formal and semiformal lenders

This paper compares lending policies of formal, informal and semiformal lenders with respect to household lending in Vietnam. The analysis suggests that the probability of using formal or semiformal credit increases if borrowers provide collateral, a guarantor and/or borrow for business‐related activities. The probability of using informal credit increases for female borrowers. It also appears that the probability of using formal credit increases in household welfare up to a certain threshold, but at a decreasing rate. In addition, the paper discerns the determinants of probability of default across lender types. Default risk of formal credit appears to be strongly affected by formal loan contract terms, e.g., loan interest rate and form of loan repayment, whereas default risk on informal loans is significantly related to the presence of propinquity and other internal characteristics of the borrowing household. Overall, the study raises several important implications for the screening, monitoring and enforcement instruments that may be employed by different types of lenders.     

Competitive equilibrium in the credit market under asymmetric information

We study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers' default probabilities. Admissible credit contracts are characterized by the credit granting probability, the loan quantity, the loan interest rate and the collateral required. The principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers; moreover, the lower risk borrowers get more credit in equilibrium than they would with full information. No credit is rationed and collateral requirements are higher for the lower risk borrowers.     

Evaluating credit risk and loan performance in online Peer-to-Peer (P2P) lending

Online Peer-to-Peer (P2P) lending has emerged recently. This micro loan market could offer certain benefits to both borrowers and lenders. Using data from the Lending Club, which is one of the popular online P2P lending houses, this article explores the P2P loan characteristics, evaluates their credit risk and measures loan performances. We find that credit grade, debt-to-income ratio, FICO score and revolving line utilization play an important role in loan defaults. Loans with lower credit grade and longer duration are associated with high mortality rate. The result is consistent with the Cox Proportional Hazard test which suggests that the hazard rate or the likelihood of the loan default increases with the credit risk of the borrowers. Finally, we find that higher interest rates charged on the high-risk borrowers are not enough to compensate for higher probability of the loan default. The Lending Club must find ways to attract high FICO score and high-income borrowers in order to sustain their businesses.     

Heterogeneity of farm loan packaging term decisions: a finite mixture approach

This article revisits the minority borrowers’ discrimination issue in farm lending by departing from traditional loan approval-rejection or default rate-based analytical models to focus on loan packaging decisions. This study analyses such decisions using a Finite Mixture Model that optimally separates the borrowers into two sub-classes allowing for a priori unspecified heterogeneity in borrowers’ data, which has not been accounted for in previous loan discrimination analyses. Results show that non-white farm borrowers tend to receive larger loans among those in the lower loan latent class, but receive relatively lower loans in the larger loans borrower category. These farmers are also charged higher interest rates vis-à-vis their peers in both the low and high interest rate latent classes. This study’s results also indicate that male borrowers are accommodated with larger loans and longer maturities in all loan amount and maturity latent classes. This study validates the interplay among significant trends in loan packaging terms for racial and gender minority borrowers that seems logical from the lenders’ credit risk management perspective.     

A dynamic model of unsecured credit

We study the terms of credit in a competitive market in which sellers (lenders) are willing to repeatedly finance the purchases of buyers (borrowers) by engaging in a credit relationship. The key frictions are: (i) the lender cannot observe the borrower?s ability to repay a loan; (ii) the borrower cannot commit to any long-term contract; (iii) it is costly for the lender to contact a borrower and to walk away from a contract; and (iv) transactions within each credit relationship are not publicly observable. The lender?s optimal contract has two key properties: delayed settlement and debt forgiveness. Finally, we study the impact of changes in the initial cost of lending on the contract terms.     

Regulating Exclusion from Financial Markets

We study optimal enforcement in credit markets in which the only threat facing a defaulting borrower is restricted access to financial markets. We solve for the optimal level of exclusion, and link it to observed institutional arrangements. Regulation in this environment must accomplish two objectives. First, it must prevent borrowers from defaulting on one bank and transferring their resources to another bank. Second, and less obviously, it must give banks the incentive to make sizeable loans, and to honour their promises of future credit. We establish that the optimal regulation resembles observed laws governing default on debt. Moreover, if debtors have the right to a "fresh start" after bankruptcy then this must be balanced by enforceable provisions against fraudulent conveyance. Our optimal regulation is robust, in that it can be implemented in a way that does not require the regulator to have information about either the borrower or lender. Our results isolate the way in which specific institutions surrounding bankruptcy–namely rules governing asset garnishment and fraudulent conveyances–support loan markets in which borrowers have no collateral.     

Two stages credit evaluation in bank loan appraisal

Traditionally, banks conduct standard credit evaluation such as credit scoring following the receipt of loan request and make the accept/reject decision accordingly. This research explores the possibility of two stages credit evaluation in lending process. When the evaluation cost drops below the trigger cost, it pays to conduct the second-stage loan appraisal. We derive two trigger cost thresholds for borrowers who are rated as credible and default in the first stage, respectively. Contingent on the share of good borrowers relative to the bad ones, the optimal strategy of the bank can be differentiated to implement second-stage evaluation on either (1) both types, or (2) only one type, or (3) neither type of the borrowers. We find that during severe economic contractions or in geographic areas/industries which are in deep troubles, whilst the borrowers who repay the loan are out-numbered by the borrowers who fail to pay, the trigger cost for good borrower is higher than that of default borrower. In this scenario, the banks are more inclined to undertake the second-stage credit evaluation on good borrowers. On the other hand, if the percentage of credible borrowers is higher than that of default borrowers, the trigger cost for good borrower lies below the trigger cost of default borrower. As a result, the banks are less inclined to undertake the second-stage evaluation on good borrowers.     

住房抵押贷款的违约风险分析

本文运用期权数值方法分析住房抵押贷款借款者的违约行为,主要是分析抵押贷款违约期权的最优实施边界。这使得我们能够解释哪些房价和利率组合会引发借款者违约以及未来的违约概率。我们发现导致违约的房产价格高度依赖于同期市场利率,而且违约与贷款类型高度相关。我们考察了次优出售和再融资的情形,还考察了借款者面临违约声誉损失的情形,结果表明期权数值方法是稳健可靠的。本文的分析还使我们对美国次贷危机有更为客观理性的认识。     

The supply- and demand-side impacts of credit market information

We utilize a unique pair of experiments to isolate the ways in which reductions in asymmetric information alter credit market outcomes. A Guatemalan microfinance lender gradually started using a credit bureau across its branches without letting borrowers know about it. One year later, we ran a large randomized credit information course that described the existence and workings of the bureau to the clients of this lender. This pairing of natural and randomized experiments allows us to separately identify how new information enters on the supply and the demand sides of the market. Our results indicate that the credit bureau generated large efficiency gains for the lender, and that these gains were augmented when borrowers understood the rules of the game. The credit bureau rewarded good borrowers but penalized weaker ones, increasing economic differentiation.     

BANKRUPTCY AND DELINQUENCY IN A MODEL OF UNSECURED DEBT

This article documents and interprets a fact central to the dynamics of informal consumer debt default. We observe that for individuals 60– 90 days late on payments, (i) 85% make payments during the next quarter, and (ii) 40% reduce their debt. To understand these facts, we develop a quantitative model of debt delinquency and bankruptcy. Our model reproduces the dynamics of delinquency and suggests an interpretation of the data in which lenders frequently reset loan terms for delinquent borrowers, typically offering partial debt forgiveness, instead of a blanket imposition of the “penalty rates” most unsecured credit contracts specify.     

网络借贷中羊群效应的存在性、驱动机制与投资者投资效率*

本文探究了网络借贷中羊群效应的存在性、背后的驱动机制以及对投资者投资效率的影响。实证结果表明，在控制了标的流标风险和时间固定效应后，我国网络借贷投资者群体中存在显著的羊群效应。进一步，标的羊群效应程度与借款人信息以及投资者类型紧密相关，借款人的还款能力越低，参与投资的投资者风险厌恶程度越低，则该标的的羊群效应越显著，说明羊群效应是“风险厌恶程度较低的投资者期望通过模仿他人的投资选择来消除由于信息不对称带来的违约风险”造成的结果。最后，网络借贷中的羊群效应有利于提升投资者的投资效率，具体表现在羊群效应提高了投资者成功投资的概率，并且有助于投资者在低质量标的中将资金投资到潜在违约风险更低的标的之中。     

Borrower credit access and credit performance after loan modifications

While the preventive effect of loan modifications on mortgage default has been well-documented, evidence on the broad consequences of modifications has been fairly limited. Based on two unique loan-level data sets with borrower credit profiles, this study reports novel empirical evidence on how homeowners manage their credit before and after receiving modifications. The paper has several main findings. First, loan modifications improve borrowers’ overall credit standing and access to credit. Modifications that provide principal reduction, rate reduction, or greater payment relief, as well as those received by borrowers not in financial catastrophe, lead to a larger improvement in borrowers’ credit rating than others. Second, loan modifications lead to a slight increase in borrowers’ debts, primarily on home equity line of credit accounts and auto loans. Third, borrowers’ performance on nonmortgage accounts, however, has not been negatively impacted by modifications. This study demonstrates that interventions designed to improve household balance sheets could have a direct and sizeable impact on borrower financial outcomes.     

Household’s optimal mortgage and unsecured loan default decision

How do households make optimal borrowing and default decisions when they have the option to borrow in multiple ways? In this paper, I analyze households’ optimal mortgage and unsecured loan borrowing and default decisions in the context of the recent recession. I model households as able to default on mortgage debt to walk away from capital losses, at the price of foreclosure. However, a household can also default on unsecured debt to maintain its home, in exchange for a longer exclusion from credit markets following default. Depending on the costs of each alternative, financially constrained households exhibit heterogeneity in optimal default decisions.Next, I analyze how mortgage loan modification policies, after a sudden drop in house prices, affect household choices in the mortgage and unsecured loan markets. The quantitative exercise shows that the government-driven mortgage modification program, initiated in 2009, reduces the mortgage default rate by 0.27% points. However, this increases the unsecured loan charge-off rate by 0.66% points.     

LES DÉTERMINANTS DE LA PERFORMANCE DE REMBOURSEMENT DES MICROCRÉDITS EN TUNISIE

Our work is part of the quest for sustainability of MFIs. To ensure sustainability, an MFI must be effective. It must, among others, face many risks and in particular the default risk. A question arises: what are the determinants of portfolio quality of MFIs? In other words, what are the determinants that influence delays in payment of MFIs? The interest of this research is twofold. The first is practical: knowing the importance of performance measures of microcredit as a precondition for the efficiency and financial performance of MFIs, this study identified determinants of the reimbursement rate in an MFI of Tunisia. It may even give an evidence for banks to intervene on the market of micro credit. The second is methodological: to find the determinants of reimbursement behaviour in MFIs, a binary logistic regression is used, while differing in explanatory variables between key variables and moderators’ ones, which was not met previously in the literature. The results showed that among the variables related to the characteristics of the loan, the loan amount and the borrower's experience with the MFI affect the rate of reimbursement. The credit increases the likelihood of default. Unlike, when borrower's experience with the MFI increases, the risk of default decreases. A relationship between the industry and the repayment rate has not been verified. For variables related to the characteristics of the borrower, age, educational level and marital status of the borrower appear to affect the relationship between the risk of default and the amount of credit. The effect of the credit amount on the default risk decreases as age and level of education increases. In addition, this effect is more important for married compared to the unmarried. For gender, we found that the effect of maturity on the risk of default is not the same for men or women borrowers. It seems that when the maturity increases, men provide reimbursement rates lower than women.     

The effect of lender and loan type on a borrowing firm’s equity return

Past empirical studies appear to support the idea that banks and finance companies do not differ in their ability to resolve adverse selection problems associated with issuing new debt. In this article, we find there is a difference. More specifically, using an event study we find larger abnormal returns for secured loan disclosures to lower quality borrowers when the lender is a finance company versus a bank. This suggests the market views finance companies as more effective than banks in evaluating/monitoring lower quality borrowers obtaining secured loans. We posit this is due to finance companies’ greater expertise in this type of lending, resulting from specialization. Our findings extend the literature on how lender identity can influence signals about firm value from loan disclosures. Our results also support recent findings that positive abnormal returns to borrowing firms may not be a general feature across the loan population, but may be restricted to smaller, lower quality borrowers. Finally, we are the first to provide evidence that the market takes loan type into account, not just lender and borrower type, when considering the information embedded in loan disclosures.     

Economic effects of positive credit information sharing: the case of Korea

In many countries, in addition to negative credit information such as loan default and arrears, positive credit information is also exchanged on a voluntary and reciprocal basis. Employing optimal credit decision models of profit maximizing banks, and utilizing a unique dataset of 2?million consumer loan obligors in Korea, we investigate the economic effects of sharing positive credit information in addition to negative credit information already exchanged. We find that the discriminatory power of the credit scoring model improves significantly. We proceed to investigate the economic effects of the information gap in a competitive credit market by assuming two representative banks that differ only in the level of credit information sharing. The bank that utilizes negative information only suffers from deterioration of the borrower pool and reduced profit, as high credit risk borrowers are more concentrated on this bank due to underpricing of risks. Our finding suggests that banks have incentives to voluntarily participate in the positive information sharing mechanism, since even a small difference in discriminatory power stemming from the information gap may lead to a significant fall in profitability as the distribution of borrower quality changes endogenously due to adverse selection problems.     

Expansion and welfare in microfinance: A screening model

The expansion of microfinance has triggered concerns of rising indebtedness, and higher default and interest rates. Using a screening model, we show that even if interest and default rates increase due to expansion, borrower welfare may improve. This is because: (i) all borrowers previously denied credit can obtain loans, and (ii) screening costs for pre-existing borrowers go down. Hence, policies that seek to regulate interest and screening levels can be counterproductive.     

Vertical Links Between Formal and Informal Financial Institutions

The paper investigates vertical linkages between formal and informal financial institutions. Specifically, it studies a policy that expands formal credit to informal lenders, in the hope that this will improve loan terms for borrowers who are shut out of the formal sector. Special attention is paid to the Philippines. It is argued that the effects of stronger vertical links depend on the form of lender competition. In particular, if the relationship between lenders is one of strategic cooperation (sustained by threats of reprisal in a repeated setting), an expansion of formal credit may worsen the terms faced by informal borrowers.     

Evaluating borrower’s default risk in peer-to-peer lending: evidence from a lending platform in China

Recent years have witnessed the popularity of online peer-to-peer lending, which allows individuals to borrow from and lend to each other on an Internet-based platform. Using data from a large P2P platform in China, this article explores the factors that determine the default risk based on the demographic characteristics of borrowers. Moreover, we propose a credit risk evaluation model, which can quantify the default risk of each P2P loan. Empirical results reveal that gender, age, marital status, educational level, working years, company size, monthly payment, loan amount, debt to income ratio and delinquency history play a significant role in loan defaults. Finally, we analyse the relationship between default risk and these contributory variables, and the possible causes are also discussed in this study.     

A DSGE model of banks and financial intermediation with default risk

This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due to different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral.