This document summarizes a research paper that examines how transaction costs impact lending efficiency between borrowers and lenders. It discusses how transaction costs, such as information costs, screening costs, and monitoring costs, can influence lending decisions and portfolio quality. The document then presents a model to test if incorporating borrower transaction information, like home ownership and profession, in addition to traditional loan characteristics, can help reduce transaction costs and delinquency rates compared to only using traditional variables. An analysis of loan data from an Indian bank finds that a model including both traditional and transaction variables has higher explanatory power for delinquency than a model with just traditional variables.
This document summarizes several studies on theories of capital structure and factors that influence a firm's capital structure decisions. It discusses Modigliani and Miller's capital structure irrelevance theory and its assumptions. It also reviews the pecking order theory, trade-off theory, and agency cost theory. Several empirical studies are summarized that examine the impact of firm-specific factors like profitability, size, growth, risk, and tangibility on capital structure. The studies reviewed different countries and time periods and generally found that profitability and tangibility influence debt levels while growth opportunities do not.
Do rating agencies cater evidence from rating based contractsMr HP
This summary provides the key points from the document in 3 sentences:
Rating agencies may provide inflated credit ratings to borrowers with rating-based loan contracts in order to cater to their business interests, as downgrades could negatively impact the borrowers' cash flows. The study finds evidence that rating agencies' adjustments for off-balance sheet debt and soft factors are more favorable for borrowers with rating-based contracts compared to accounting-ratio based contracts. However, the degree of rating inflation is reduced when rating agencies face higher reputational costs, such as when ratings are close to thresholds or another rating agency also provides a rating.
The purpose of paper is to recommend strategies to
increase customer loyalty through complaint management and as
a tool to manage risk. The paper encompasses the theoretical
concepts which emerge from the extensive review of literature on
complaints and risk. It was found that complaints and risk have a
significant relation and through complaint management, risk can
be reduced. The study has proposed COMPSAT Grid (reinforced
with literature review) demonstrating the state of Banks based on
no. of complaints and loyalty of customers. COMPSAT Grid can
become a base to design the strategies to increase customer’s
loyalty. The study is limited to the customer’s perceived risk. The
paper stresses on the importance of complaints in managing the
risk. Through COMPSAT grid the service providers may
modulate existing strategies to increase customer loyalty. The
concepts will establish complaint management as a basis of
marketing strategy modulation. The model is a theoretical
approach which is based on the concepts
Adverse Selection and Moral Hazard in Joint-Liability Loan ContractsArturo Rodriguez
This document summarizes a study that used an experimental design to examine the relationship between joint-liability lending, adverse selection, moral hazard, and risk preferences. The experiment involved 200 Bolivian subjects who were given hypothetical investment choices and asked to choose between individual and joint-liability loan contracts. The results indicate that subjects endowed with risky projects were more likely to choose joint-liability contracts, suggesting joint-liability may induce adverse selection. Additionally, under joint-liability contracts subjects were more likely to choose risky investments, indicating joint-liability can induce moral hazard by enabling risk shifting. The findings offer insight into why joint-liability loans have decreased in popularity among microfinance lenders and borrowers in recent years.
Corporate Governance and Risk Management: Evidence From Banking Sector of Pak...Umer Gulzar
The document discusses the impact of various corporate governance dimensions on bank risks in Pakistan. The empirical results found that board independence, gender diversity on the board, and audit committee independence have a significant effect on reducing bank risks, while board size and CEO turnover have an insignificant effect. It is recommended that corporate governance should be viewed as a facilitator for creating long-term value for stakeholders rather than an end in itself. Enhancing the influence of corporate governance mechanisms could help increase their impact on managing risks in the Pakistani banking industry. In particular, increasing audit committee independence could make management more accountable to protecting the interests of all stakeholders.
This document summarizes an experiment on microfinance games conducted in Lima, Peru over seven months. The experiment tested different individual and group lending mechanisms to explore their impact on investment decisions and loan repayment rates. Key findings include:
1) Adding "dynamic incentives" that deny future loans to those in arrears decreases risky project choice and default rates under any loan contract.
2) Group lending increases risky investment choice when borrowers can communicate, but has little effect without communication.
3) Group lending increases loan repayment rates by creating implicit insurance between borrowers, passing costs to clients. The most risk-averse borrowers bear these costs most heavily.
4) When groups form endogenously
Profitability Determinants of Go-Public Bank in Indonesia: Empirical Evidenc...inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
Determinants of capital structure of listed textile enterprises of bangladeshAlexander Decker
This document summarizes a research study on the determinants of capital structure for listed textile enterprises in Bangladesh. The study uses panel data and a fixed-effect model to examine the relationship between leverage and firm-specific factors like profitability, tangibility, size, and growth. The results found that profitability and tangibility were statistically significant determinants of leverage. This finding is consistent with both the trade-off theory and agency cost theory of capital structure. The document also reviews various capital structure theories and how they relate to different firm-specific determinants.
This document summarizes several studies on theories of capital structure and factors that influence a firm's capital structure decisions. It discusses Modigliani and Miller's capital structure irrelevance theory and its assumptions. It also reviews the pecking order theory, trade-off theory, and agency cost theory. Several empirical studies are summarized that examine the impact of firm-specific factors like profitability, size, growth, risk, and tangibility on capital structure. The studies reviewed different countries and time periods and generally found that profitability and tangibility influence debt levels while growth opportunities do not.
Do rating agencies cater evidence from rating based contractsMr HP
This summary provides the key points from the document in 3 sentences:
Rating agencies may provide inflated credit ratings to borrowers with rating-based loan contracts in order to cater to their business interests, as downgrades could negatively impact the borrowers' cash flows. The study finds evidence that rating agencies' adjustments for off-balance sheet debt and soft factors are more favorable for borrowers with rating-based contracts compared to accounting-ratio based contracts. However, the degree of rating inflation is reduced when rating agencies face higher reputational costs, such as when ratings are close to thresholds or another rating agency also provides a rating.
The purpose of paper is to recommend strategies to
increase customer loyalty through complaint management and as
a tool to manage risk. The paper encompasses the theoretical
concepts which emerge from the extensive review of literature on
complaints and risk. It was found that complaints and risk have a
significant relation and through complaint management, risk can
be reduced. The study has proposed COMPSAT Grid (reinforced
with literature review) demonstrating the state of Banks based on
no. of complaints and loyalty of customers. COMPSAT Grid can
become a base to design the strategies to increase customer’s
loyalty. The study is limited to the customer’s perceived risk. The
paper stresses on the importance of complaints in managing the
risk. Through COMPSAT grid the service providers may
modulate existing strategies to increase customer loyalty. The
concepts will establish complaint management as a basis of
marketing strategy modulation. The model is a theoretical
approach which is based on the concepts
Adverse Selection and Moral Hazard in Joint-Liability Loan ContractsArturo Rodriguez
This document summarizes a study that used an experimental design to examine the relationship between joint-liability lending, adverse selection, moral hazard, and risk preferences. The experiment involved 200 Bolivian subjects who were given hypothetical investment choices and asked to choose between individual and joint-liability loan contracts. The results indicate that subjects endowed with risky projects were more likely to choose joint-liability contracts, suggesting joint-liability may induce adverse selection. Additionally, under joint-liability contracts subjects were more likely to choose risky investments, indicating joint-liability can induce moral hazard by enabling risk shifting. The findings offer insight into why joint-liability loans have decreased in popularity among microfinance lenders and borrowers in recent years.
Corporate Governance and Risk Management: Evidence From Banking Sector of Pak...Umer Gulzar
The document discusses the impact of various corporate governance dimensions on bank risks in Pakistan. The empirical results found that board independence, gender diversity on the board, and audit committee independence have a significant effect on reducing bank risks, while board size and CEO turnover have an insignificant effect. It is recommended that corporate governance should be viewed as a facilitator for creating long-term value for stakeholders rather than an end in itself. Enhancing the influence of corporate governance mechanisms could help increase their impact on managing risks in the Pakistani banking industry. In particular, increasing audit committee independence could make management more accountable to protecting the interests of all stakeholders.
This document summarizes an experiment on microfinance games conducted in Lima, Peru over seven months. The experiment tested different individual and group lending mechanisms to explore their impact on investment decisions and loan repayment rates. Key findings include:
1) Adding "dynamic incentives" that deny future loans to those in arrears decreases risky project choice and default rates under any loan contract.
2) Group lending increases risky investment choice when borrowers can communicate, but has little effect without communication.
3) Group lending increases loan repayment rates by creating implicit insurance between borrowers, passing costs to clients. The most risk-averse borrowers bear these costs most heavily.
4) When groups form endogenously
Profitability Determinants of Go-Public Bank in Indonesia: Empirical Evidenc...inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
Determinants of capital structure of listed textile enterprises of bangladeshAlexander Decker
This document summarizes a research study on the determinants of capital structure for listed textile enterprises in Bangladesh. The study uses panel data and a fixed-effect model to examine the relationship between leverage and firm-specific factors like profitability, tangibility, size, and growth. The results found that profitability and tangibility were statistically significant determinants of leverage. This finding is consistent with both the trade-off theory and agency cost theory of capital structure. The document also reviews various capital structure theories and how they relate to different firm-specific determinants.
This document summarizes a study that compares customers' perceived risk in electronic banking versus traditional banking in branches. The study examines four dimensions of risk perception: physical, performance, financial, and time-consuming. A questionnaire was distributed to 360 customers at a bank in Tabriz, Iran to analyze differences in risk perception between the two banking methods. The results found meaningful differences in physical, financial, and time-consuming risk perceptions, but no difference in psycho-sociological risk perception. The study concludes banks should improve communication, privacy, and e-banking culture to enrich the e-banking process.
Governance of buyer supplier relationship in morocco context qualitative studyAlexander Decker
This document summarizes a research paper about governance of buyer-supplier relationships in Morocco. It discusses how collaborative, long-term relationships can provide competitive advantages but also notes that many such relationships fail. The document reviews contractual and relational approaches to understanding buyer-supplier relationships. It discusses how relational approaches consider non-contractual factors like trust, commitment, and learning that influence relationship effectiveness and sustainability. Finally, it examines theories of power and dependence in relationships and how mutual dependence between buyers and suppliers can encourage cooperative behavior.
Joint-liability lending and asymmetric informationArturo Rodriguez
This document summarizes a research paper that experimentally tested for asymmetric information problems in joint-liability lending in Bolivia. The experiment included five treatments to test for adverse selection and moral hazard. Results showed evidence of adverse selection, as risky borrowers preferred individual loans, but not moral hazard. Free riding behavior among group members, rather than risk diversification, appeared to drive these results. The document provides background on theories of adverse selection, moral hazard, and how joint-liability lending has been shown to potentially reduce these problems by promoting peer screening and endogenous group formation.
The document examines the determinants of corporate leverage in Indonesian companies. It analyzes data from 22 companies over the period of 2012-2016 to determine the effects of bond yield, company size, and liquidity on total debt, long-term debt, and short-term debt levels. The analysis uses a random effects regression model. The results show that bond yield has no effect on total debt and short-term debt, while company size and liquidity negatively affect total debt and short-term debt. For long-term debt, bond yield has a positive effect while company size has no effect, and liquidity has a positive effect. In general, the results indicate that leverage patterns in the sample companies are most aligned with short
Managing Material and Logistics Embeddedness: Material Buyers' PerspectiveRuss Merz, Ph.D.
Because an organization's visibility and decision-making abilities in a supply network is limited by its embeddedness, managing the embedded activities may be affected by non-contractual forms of governance and capability. Whatever the organization cannot see, it can't efficiently control. In this paper, the authors have studied non-contractual governance, dependence, and reliance in a manufacturer-vendor dyad in light of logistics, spill-over customer-centric service, and performance. Relational norms (information sharing and flexibility), trust, commitment, and bilateral dependence were hypothesized to explain manufacturers' logistics capability and customer-centric services. Using SEM-PLS (Structural Equation Modeling using Partial Least Squares) approach, all the hypothesized paths were proven with adequate R2 explained for each construct; R2 for financial performance was low.
Design and Implementation Decision Support System using MADM Methode for Bank...IJRESJOURNAL
ABSTRACT: The function of banking process can be broadly defined as an institution functioning as a capital receiver and lender, as well as support for trading and payment transactions. In order to maintain the stability of the economy through lending, Bank Indonesia issued a form letter on March 15, 2012 on the application of risk management for the bank conducting credit. In an effort to minimize these problems, Bank Indonesia recommends the precautionary principle in arranging the loan terms and choose the prospective customer in the credit granting institutions, both banks and cooperatives to take into account the risk on lending. A method is needed to select bank for credit applications to the public, i.e. the customer. This research uses the comparison of MADM (Multiple Attribute Decision Making) between TOPSIS (Technique for Order Preference by Similarity to Ideal Solution) method and ELECTRE (ELimination Et Choix TRaduisant la realitE) method for the loan provisions to the customers. With the hope of getting the quickest and the most accurate solutions, the hesitancy in determining customers for lending can then be minimized.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Does external stakeholder orientation in corporate governance influence in su...Shahadat Hossain
This document summarizes a literature review examining the role of external stakeholders in the governance of microfinance institutions (MFIs) and how external stakeholder orientation influences MFI sustainability and outreach. The review finds that while external stakeholder orientation on boards does not directly improve financial performance, it can indirectly benefit MFIs and sometimes helps increase social outreach. Factors like regulation, external ratings, auditing, and international orientation do not consistently lead to higher profits but can deepen outreach. Competition tends to hurt financial performance but may improve organizational efficiency. The review explores the types of external stakeholders in MFIs and how their involvement differs from traditional corporations due to MFIs' atypical structures and operations.
This document discusses governance and performance of microfinance institutions (MFIs) in India. It analyzes how governance mechanisms influence various performance and risk measures using data from 60 MFIs. Governance is important for MFIs to achieve their dual goals of reaching poor clients and achieving financial sustainability. The document differentiates between financial performance metrics like return on assets and operational costs, and outreach metrics like number of active borrowers. It explores how board characteristics, ownership type, regulation, and lending innovations may impact these outcomes.
Determinants of capital_structure_an_empR Ehan Raja
This document summarizes a research paper that investigates the determinants of capital structure for manufacturing firms in Pakistan. The paper reviews various capital structure theories and identifies firm-specific factors that may influence a firm's debt ratio. An empirical analysis is then conducted using data from 160 Pakistani manufacturing firms to determine which factors, such as profitability, size, liquidity, etc., are significantly related to the debt ratios of these firms. The findings indicate several factors predicted by trade-off theory, pecking order theory, and agency theory help explain the financing behavior of Pakistani firms, suggesting some universal applicability of capital structure models from Western settings.
This document summarizes a paper that develops a framework to study the effects of foreign competition on Mexico's banking industry dynamics and welfare. It applies the framework to analyze Mexico's banking industry in the 1990s, which underwent major changes as foreign restrictions were lifted. The model considers strategic interaction between domestic and foreign banks, and allows calibration to Mexican data to examine the welfare impacts of policies promoting global competition. It finds modest household welfare gains and substantial business gains from increased foreign participation in Mexico's banking sector.
Service+quality+value+allignment+through internal customer orientation in fin...Tapan Panda
This document summarizes a research study that examined service quality and internal customer orientation in an Indian public sector bank. The study surveyed bank employees in branches (front office) and regional loan departments (back office) to compare their perceptions of 14 service quality dimensions. The results found no statistically significant differences between the two groups' responses. However, some differences were observed based on employee demographics. Overall, the study found similarities between front and back office employees' views of service quality, suggesting the bank presents a consistent experience to external customers.
1) Relaxed lending standards and increased competition for loans have led to riskier loans and a potential for higher defaults. Title insurance, traditionally used for real estate loans, is now being applied to secured commercial loans as a risk management tool.
2) Title insurance for secured commercial loans, called UCC insurance, insures the validity and priority of a lender's security interest in business assets like equipment and inventory. It protects against defects in loan documentation.
3) UCC insurance is gaining acceptance as a way for lenders to reduce legal risks associated with secured commercial loans, especially with more risky economic conditions expected. It provides efficiency and attention to detail that can strengthen collateral positions.
Explaining the determinants of trade credit an empirical study in the case of...Alexander Decker
This document summarizes a research study that investigated the determinants of trade credit for 403 unlisted Saudi Arabian firms from 2000 to 2004. The study found that trade credit accounts for a large portion of liabilities for these firms. Using a panel data estimation technique, the study tested hypotheses related to five determinants of trade credit: availability of financial resources, firm creditworthiness, profitability, liquidity, and growth opportunities. The results showed that trade credit is negatively related to traditional debt sources but positively related to firm size, liquidity measures like current assets, and growth. Trade credit was found to be negatively related to firm age and profitability, consistent with hypotheses.
Determinants of trade credit use by private traders in ethiopia case of mekel...Alexander Decker
This document summarizes a research study that investigated the determinants of trade credit use among 198 private traders in Mekelle city, Ethiopia. The study found that 58% of traders used trade credit. A binary logistic regression model was used to analyze how owner characteristics (gender, education), business characteristics (age of business, length of trade relationship, purchase frequency and volume), and access to bank loans impacted the likelihood of using trade credit. The results showed that gender, education, age of business, length of trade relationship, purchase frequency and volume were all significant factors in determining trade credit use among private traders.
THE IMPACT OF PSYCHOLOGICAL BARRIERS IN INFLUENCING CUSTOMERS’ DECISIONS IN T...ijmpict
Increased competition in broadband telecommunication market led to a surge in campaigns and packages for customers. Whereas traditional economic theory assumed that abundance of alternatives is to be welcomed by customers, recent theories however, have emphasized that multiple choices may have a negative role in adoption or switching behavior. The unorthodox conclusions of negative impact of wide assortment of choices were studied through the lens of behavioral economics. Most notably, “anticipated regret” was identified to be major cause of choice deferral of purchase. This paper investigates the role of selection difficulty and anticipated regret on the intention of broadband subscribers to upgrade to higher connection speed. The result shows that there is a significant positive relationship between anticipated regret and decision avoidance. Results also indicate that selection difficulty has positive relationship with switching cost thus indirectly reducing the perceived net benefit of upgraded internet connection. This study, therefore, confirmed the significant impact of psychological barriers together with economic factors in influencing customers’ decisions in the telecommunication sector. This paper thus recommends managers of telecom firms and regulators to seek reducing anticipated regret and selection difficulty when promoting upgraded services even when such services are promising higher economic benefit.
THE IMPACT OF PSYCHOLOGICAL BARRIERS IN INFLUENCING CUSTOMERS’ DECISIONS IN T...ijmpict
Increased competition in broadband telecommunication market led to a surge in campaigns and packages
for customers. Whereas traditional economic theory assumed that abundance of alternatives is to be
welcomed by customers, recent theories however, have emphasized that multiple choices may have a
negative role in adoption or switching behavior. The unorthodox conclusions of negative impact of wide
assortment of choices were studied through the lens of behavioral economics. Most notably, “anticipated
regret” was identified to be major cause of choice deferral of purchase. This paper investigates the role of
selection difficulty and anticipated regret on the intention of broadband subscribers to upgrade to higher
connection speed. The result shows that there is a significant positive relationship between anticipated
regret and decision avoidance. Results also indicate that selection difficulty has positive relationship with
switching cost thus indirectly reducing the perceived net benefit of upgraded internet connection. This
study, therefore, confirmed the significant impact of psychological barriers together with economic factors
in influencing customers’ decisions in the telecommunication sector. This paper thus recommends
managers of telecom firms and regulators to seek reducing anticipated regret and selection difficulty when
promoting upgraded services even when such services are promising higher economic benefit.
This document summarizes a study examining the role of borrower reputation in mitigating adverse selection and moral hazard in the subprime mortgage market leading up to the 2007-2008 financial crisis. The study uses data from a major subprime lender to analyze the differences between full documentation and low documentation loans. It finds that while low documentation loans performed worse, this effect was strongest for low-doc loans to W2 borrowers who could have obtained full-doc loans. However, for self-employed borrowers who relied on low-doc loans for credit access, there was little difference in performance between loan types. This suggests reputation concerns constrained adverse selection and income exaggeration for self-employed borrowers on low-doc loans. The
This document summarizes a study that compares customers' perceived risk in electronic banking versus traditional banking in branches. The study examines four dimensions of risk perception: physical, performance, financial, and time-consuming. A questionnaire was distributed to 360 customers at a bank in Tabriz, Iran to analyze differences in risk perception between the two banking methods. The results found meaningful differences in physical, financial, and time-consuming risk perceptions, but no difference in psycho-sociological risk perception. The study concludes banks should improve communication, privacy, and e-banking culture to enrich the e-banking process.
Governance of buyer supplier relationship in morocco context qualitative studyAlexander Decker
This document summarizes a research paper about governance of buyer-supplier relationships in Morocco. It discusses how collaborative, long-term relationships can provide competitive advantages but also notes that many such relationships fail. The document reviews contractual and relational approaches to understanding buyer-supplier relationships. It discusses how relational approaches consider non-contractual factors like trust, commitment, and learning that influence relationship effectiveness and sustainability. Finally, it examines theories of power and dependence in relationships and how mutual dependence between buyers and suppliers can encourage cooperative behavior.
Joint-liability lending and asymmetric informationArturo Rodriguez
This document summarizes a research paper that experimentally tested for asymmetric information problems in joint-liability lending in Bolivia. The experiment included five treatments to test for adverse selection and moral hazard. Results showed evidence of adverse selection, as risky borrowers preferred individual loans, but not moral hazard. Free riding behavior among group members, rather than risk diversification, appeared to drive these results. The document provides background on theories of adverse selection, moral hazard, and how joint-liability lending has been shown to potentially reduce these problems by promoting peer screening and endogenous group formation.
The document examines the determinants of corporate leverage in Indonesian companies. It analyzes data from 22 companies over the period of 2012-2016 to determine the effects of bond yield, company size, and liquidity on total debt, long-term debt, and short-term debt levels. The analysis uses a random effects regression model. The results show that bond yield has no effect on total debt and short-term debt, while company size and liquidity negatively affect total debt and short-term debt. For long-term debt, bond yield has a positive effect while company size has no effect, and liquidity has a positive effect. In general, the results indicate that leverage patterns in the sample companies are most aligned with short
Managing Material and Logistics Embeddedness: Material Buyers' PerspectiveRuss Merz, Ph.D.
Because an organization's visibility and decision-making abilities in a supply network is limited by its embeddedness, managing the embedded activities may be affected by non-contractual forms of governance and capability. Whatever the organization cannot see, it can't efficiently control. In this paper, the authors have studied non-contractual governance, dependence, and reliance in a manufacturer-vendor dyad in light of logistics, spill-over customer-centric service, and performance. Relational norms (information sharing and flexibility), trust, commitment, and bilateral dependence were hypothesized to explain manufacturers' logistics capability and customer-centric services. Using SEM-PLS (Structural Equation Modeling using Partial Least Squares) approach, all the hypothesized paths were proven with adequate R2 explained for each construct; R2 for financial performance was low.
Design and Implementation Decision Support System using MADM Methode for Bank...IJRESJOURNAL
ABSTRACT: The function of banking process can be broadly defined as an institution functioning as a capital receiver and lender, as well as support for trading and payment transactions. In order to maintain the stability of the economy through lending, Bank Indonesia issued a form letter on March 15, 2012 on the application of risk management for the bank conducting credit. In an effort to minimize these problems, Bank Indonesia recommends the precautionary principle in arranging the loan terms and choose the prospective customer in the credit granting institutions, both banks and cooperatives to take into account the risk on lending. A method is needed to select bank for credit applications to the public, i.e. the customer. This research uses the comparison of MADM (Multiple Attribute Decision Making) between TOPSIS (Technique for Order Preference by Similarity to Ideal Solution) method and ELECTRE (ELimination Et Choix TRaduisant la realitE) method for the loan provisions to the customers. With the hope of getting the quickest and the most accurate solutions, the hesitancy in determining customers for lending can then be minimized.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Does external stakeholder orientation in corporate governance influence in su...Shahadat Hossain
This document summarizes a literature review examining the role of external stakeholders in the governance of microfinance institutions (MFIs) and how external stakeholder orientation influences MFI sustainability and outreach. The review finds that while external stakeholder orientation on boards does not directly improve financial performance, it can indirectly benefit MFIs and sometimes helps increase social outreach. Factors like regulation, external ratings, auditing, and international orientation do not consistently lead to higher profits but can deepen outreach. Competition tends to hurt financial performance but may improve organizational efficiency. The review explores the types of external stakeholders in MFIs and how their involvement differs from traditional corporations due to MFIs' atypical structures and operations.
This document discusses governance and performance of microfinance institutions (MFIs) in India. It analyzes how governance mechanisms influence various performance and risk measures using data from 60 MFIs. Governance is important for MFIs to achieve their dual goals of reaching poor clients and achieving financial sustainability. The document differentiates between financial performance metrics like return on assets and operational costs, and outreach metrics like number of active borrowers. It explores how board characteristics, ownership type, regulation, and lending innovations may impact these outcomes.
Determinants of capital_structure_an_empR Ehan Raja
This document summarizes a research paper that investigates the determinants of capital structure for manufacturing firms in Pakistan. The paper reviews various capital structure theories and identifies firm-specific factors that may influence a firm's debt ratio. An empirical analysis is then conducted using data from 160 Pakistani manufacturing firms to determine which factors, such as profitability, size, liquidity, etc., are significantly related to the debt ratios of these firms. The findings indicate several factors predicted by trade-off theory, pecking order theory, and agency theory help explain the financing behavior of Pakistani firms, suggesting some universal applicability of capital structure models from Western settings.
This document summarizes a paper that develops a framework to study the effects of foreign competition on Mexico's banking industry dynamics and welfare. It applies the framework to analyze Mexico's banking industry in the 1990s, which underwent major changes as foreign restrictions were lifted. The model considers strategic interaction between domestic and foreign banks, and allows calibration to Mexican data to examine the welfare impacts of policies promoting global competition. It finds modest household welfare gains and substantial business gains from increased foreign participation in Mexico's banking sector.
Service+quality+value+allignment+through internal customer orientation in fin...Tapan Panda
This document summarizes a research study that examined service quality and internal customer orientation in an Indian public sector bank. The study surveyed bank employees in branches (front office) and regional loan departments (back office) to compare their perceptions of 14 service quality dimensions. The results found no statistically significant differences between the two groups' responses. However, some differences were observed based on employee demographics. Overall, the study found similarities between front and back office employees' views of service quality, suggesting the bank presents a consistent experience to external customers.
1) Relaxed lending standards and increased competition for loans have led to riskier loans and a potential for higher defaults. Title insurance, traditionally used for real estate loans, is now being applied to secured commercial loans as a risk management tool.
2) Title insurance for secured commercial loans, called UCC insurance, insures the validity and priority of a lender's security interest in business assets like equipment and inventory. It protects against defects in loan documentation.
3) UCC insurance is gaining acceptance as a way for lenders to reduce legal risks associated with secured commercial loans, especially with more risky economic conditions expected. It provides efficiency and attention to detail that can strengthen collateral positions.
Explaining the determinants of trade credit an empirical study in the case of...Alexander Decker
This document summarizes a research study that investigated the determinants of trade credit for 403 unlisted Saudi Arabian firms from 2000 to 2004. The study found that trade credit accounts for a large portion of liabilities for these firms. Using a panel data estimation technique, the study tested hypotheses related to five determinants of trade credit: availability of financial resources, firm creditworthiness, profitability, liquidity, and growth opportunities. The results showed that trade credit is negatively related to traditional debt sources but positively related to firm size, liquidity measures like current assets, and growth. Trade credit was found to be negatively related to firm age and profitability, consistent with hypotheses.
Determinants of trade credit use by private traders in ethiopia case of mekel...Alexander Decker
This document summarizes a research study that investigated the determinants of trade credit use among 198 private traders in Mekelle city, Ethiopia. The study found that 58% of traders used trade credit. A binary logistic regression model was used to analyze how owner characteristics (gender, education), business characteristics (age of business, length of trade relationship, purchase frequency and volume), and access to bank loans impacted the likelihood of using trade credit. The results showed that gender, education, age of business, length of trade relationship, purchase frequency and volume were all significant factors in determining trade credit use among private traders.
THE IMPACT OF PSYCHOLOGICAL BARRIERS IN INFLUENCING CUSTOMERS’ DECISIONS IN T...ijmpict
Increased competition in broadband telecommunication market led to a surge in campaigns and packages for customers. Whereas traditional economic theory assumed that abundance of alternatives is to be welcomed by customers, recent theories however, have emphasized that multiple choices may have a negative role in adoption or switching behavior. The unorthodox conclusions of negative impact of wide assortment of choices were studied through the lens of behavioral economics. Most notably, “anticipated regret” was identified to be major cause of choice deferral of purchase. This paper investigates the role of selection difficulty and anticipated regret on the intention of broadband subscribers to upgrade to higher connection speed. The result shows that there is a significant positive relationship between anticipated regret and decision avoidance. Results also indicate that selection difficulty has positive relationship with switching cost thus indirectly reducing the perceived net benefit of upgraded internet connection. This study, therefore, confirmed the significant impact of psychological barriers together with economic factors in influencing customers’ decisions in the telecommunication sector. This paper thus recommends managers of telecom firms and regulators to seek reducing anticipated regret and selection difficulty when promoting upgraded services even when such services are promising higher economic benefit.
THE IMPACT OF PSYCHOLOGICAL BARRIERS IN INFLUENCING CUSTOMERS’ DECISIONS IN T...ijmpict
Increased competition in broadband telecommunication market led to a surge in campaigns and packages
for customers. Whereas traditional economic theory assumed that abundance of alternatives is to be
welcomed by customers, recent theories however, have emphasized that multiple choices may have a
negative role in adoption or switching behavior. The unorthodox conclusions of negative impact of wide
assortment of choices were studied through the lens of behavioral economics. Most notably, “anticipated
regret” was identified to be major cause of choice deferral of purchase. This paper investigates the role of
selection difficulty and anticipated regret on the intention of broadband subscribers to upgrade to higher
connection speed. The result shows that there is a significant positive relationship between anticipated
regret and decision avoidance. Results also indicate that selection difficulty has positive relationship with
switching cost thus indirectly reducing the perceived net benefit of upgraded internet connection. This
study, therefore, confirmed the significant impact of psychological barriers together with economic factors
in influencing customers’ decisions in the telecommunication sector. This paper thus recommends
managers of telecom firms and regulators to seek reducing anticipated regret and selection difficulty when
promoting upgraded services even when such services are promising higher economic benefit.
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Transaction costs AND INFORMATION EFFICIENCY IN CREDIT INTERMEDIATION
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Transaction Costs and Efficiency in Intermediation
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2. Journal of
Services Research
Volume 13 Number 1 April - September 2013
Transaction Costs and Efficiency in In-
termediation
The Journal of IIMT
Dr. Dinabandhu Bag
Associate Professor
School of Management
National Institute of Technology
Rourkela, Orissa, India
Email: dinabandhu.bag@gmail.com.
4. 96 Transaction Costs and Efficiency
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
ing and enforcement costs, to control possible opportunistic behavior of
clients (moral hazard) and adverse selection (Gray, 1993). One can denote
these types of transaction costs as information costs. Hence, information
costs are defined as the cost incurred to ensure that borrowers adhere to
terms of the loan. Therefore, information costs impact the operating costs
in lending and determine the successful completion of a financial transac-
tion (Cole, 1998). Monitoring activities are desired to enable lenders to
obtain complete knowledge of the borrower. This study attempts to review
previous work on transaction costs and also attempts to demonstrate the
benefits of transaction theory usage on the borrower delinquency using
test data on retail revolving assets for an Indian bank. The next section
describes the literature on transaction costs.
Transaction Costs
The theory of transaction costs has been a very important driver in ex-
plaining the growth of the financial sector in the past few decades. Empiri-
cal research on financial intermediation has placed information costs at the
center of total transaction costs incurred in conducting financial exchang-
es. Transactions costs make the presence of credit granting decisions cost-
lier which means risk-averse lenders could deny sanctioning credit. Theo-
retical framework of transaction costs have been suitably discussed in the
literature. There have been a number of previous researches on transaction
costs and information sharing among lenders to improve the performance
of credit markets (Campion, 2001, DeJanvry, 2003, Luoto et al, 2007,
Miller, 2003, Vercamen, 1995, Cowan et al, 2003, McIntosh, 2009 and
2005, Japelli, 1993, etc). Transaction costs theory involves the design of
efficient mechanisms for conducting economic transactions. The basic
assumption is that economic transactions have potential costs associated
with them where a transaction is the basic unit of analysis and is impor-
tant in economizing transaction costs (Romano, 1992). Williamson (1985)
states that transaction costs is the resultant friction that arises in under-
taking transactions among exchange parties. The friction associated with
transactions is mainly caused by opportunistic behavior that usually arises
when two parties in an exchange fail to fulfill their obligations. The pres-
ence of collaterals can reduce transaction costs in such an exchange. Few
theorists (Bardhan and Udry, 1999) placed emphasis on the acquisition of
5. 97 Bag
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
cost minimizing requirement such as lower reliance on collateral to reduce
the incidence of opportunism. Other theorists have proposed the design of
incentive mechanisms to discourage behavior that lead to diverging inter-
ests among exchange parties (Coase, 1991).Williamson (1985) points out
that complex formal contracting and vertical linkages are only effective
if they exist in a complementary relationship with relational governance.
Lending relationships are viewed as one of the mechanisms by which fric-
tions in the economic exchange of goods and services among agents can
be reduced. There exist two types of transaction costs, ex post and ex ante
costs in financial exchange. Ex ante transaction costs are incurred to build
and establish credit relationships contracts such as costs of collecting in-
formation to make agreements. Ex post costs are incurred to minimize the
chances of default such as the costs of recovery and the bonding costs of
effecting secure commitments (Williamson, 1985). Both types of costs
are critical in operation of financial intermediation services and this study
focuses on ex ante transaction costs which can also help in reducing ex
post costs (Stiglitz and Weiss, 1981). The most critical factors influenc-
ing transaction costs are, kind and type of lending product, the degree of
uncertainty associated with the transaction and the ease with the measure-
ment of performance can be done (Klein, et al., 1978; Williamson, 1985).
In a study of manufacturing industries (Klein, et al. (1978) demonstrated
that if the switching costs between suppliers were low then both parties
were protected by the availability of alternative partners so that they incur
minimal transactional risks. However, if an asset is designed for a particu-
lar borrower, then the lender would cause serious transaction costs which
refers to the substitutability of contracts since it may not be easy to sub-
stitute. Williamson (1985) and Coase (1991) proposed that the decision to
have a transaction in the market place is determined by the magnitude of
transaction costs. Given a choice, individuals will choose the set of institu-
tions, contracts and transactions that is the minimum costs of creating or
sustaining relationships.
The requirement of collateral is ensured before loans are issued in
order to enhance the likelihood that a financial firm will be able to recover
its loan through liquidation of collateral (Cole, 1998). Hence, the aim of
the collateral requirement is that in case a borrower fails to repay the loan
willingly, a lender can get paid by taking repossession of the collateral and
6. 98 Transaction Costs and Efficiency
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
recover the debt (Mann, 1997). Collateral not only serves as a secondary
source of repayment in case of loan default, but is also useful in classify-
ing risky groups of borrowers (Cole, 1998). In case a loan is defaulted,
a financial institution takes direct control over the assets until a loan is
completely paid off (Mann, 1997). Banks incur costs to verify and attach
value to collateral before loans are issued to borrowers which may in-
crease when collateral assets are located in remote areas or possess lower
marketability value (Tomer, 1998). Further, banks may face liquidity risks
when collateral assets are liquidated at a price lower than contracted value.
When a borrower repeatedly and successfully transacts with a Bank (or
other Banks) for a long time, it creates reputation (with information on
his/her relationships) and thus provides evidence that he is not liable to
default. In such lending relationships, the bank may reduce its demands
for collateral from such a borrower (Cole, 1998). In line with the above
argument, it is anticipated in this study that if the bank-borrower lending
relationship holds longer, the collateral requirements may be reduced or
waived and the bank does not necessarily have to incur costs associated
with the collateral requirement.
Uncertainty in financial exchange also occurs because firms lack ap-
propriate information necessary to predict opportunistic behavior of cus-
tomers. Uncertainty also arises due to unexpected changes in technology,
competition, interest rates, and factors affecting the demand for credit
(McNaughton, 1997). Consequently, lenders will likely desire different
and most likely more stringent repayment terms in form of interest rates,
loan maturities, and loan installments, from the borrowers. In addition, the
presence of uncertainty requires managers of financial intermediaries to
design performance aimed at protecting their businesses (Coase, 1991) by
mitigating the agency problem.
Formal loan contracts may specify loan terms, monitoring activities,
and enforcement mechanisms in case of nonperformance. Therefore a
bank will avoid the grant of credit to many new borrower applicants to
avoid the large costs of monitoring and credit losses when such loans are
defaulted, which is known as credit rationing (Stigliz, 1981).
The use of information costs can create a screening effect that can
improve the risk assessment of loan applicants, thereby raising portfolio
quality (since it prevents uncreditworthy borrowers from penetrating into
7. 99 Bag
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
the Bank), which in turn reduces the loss rates on portfolio. It also creates
an incentive effect since it may deter the borrowers from failing to repay
on past loans. Stiglitz and Weiss (1981) revealed that when borrowers
undertake riskier investments with higher expected payoffs, it reduces the
expected payoff to the lender since it increases their probability of default.
Vercamenon (1995), De Janveres et al (2003) and Herera (2003) also
demonstrated the capitalization of reputation collateral by providing their
credit worthiness for later loans and greater access to financial services.
In presence of relational information, certain costs such as screening and
monitoring are likely to decrease (Luoto, Williamson). The existence of
a relationship provides information about the performance of businesses
necessary for future loans. Promotion of greater relationship lending prac-
tices in financial exchange would imply that the information advantage
available to the bank would control the opportunistic behavior of borrow-
ers and require less monitoring and enforcement. Therefore, information
costs may be considered equivalent of what Williamson (1985) suggests
in his definition of transaction costs; as the costs of safeguarding contracts,
and the bargaining and haggling costs of moving contracts from one point
to another.
Consistent with the above research, this study examines the influence
of relationship based transaction variables on the behavior of coordination
costs incurred. Ultimately, it is assumed that a significant reduction of
transaction costs is expected in the presence of borrower information. The
literature on credit markets of India with the scenario of Indian banks is
limited to its application for credit rating for corporate borrowers. Credit
Rating agencies (CRAs) such as CRISIL, CARE, ICRA and recently Dun
&Brad Street have used firm’s credit history data to obtain their credit rat-
ing. Credit Information Bureau (India) Ltd. (CIBL) was established only
in year 2000, hence application of its products to retail borrowers is very
recent. Khatwani, et al (2006) investigated Indian corporate bank loan de-
faults using CIBIL data on 90 manufacturing firms and using discriminant
analysis technique, highlighting few financial ratios which were critical
to corporate defaults. Bandopadhya (2008) developed a credit scoring
model for agricultural loan portfolio for Indian banks and using logistic
regression on a sample of 448 Indian agricultural borrowers identified a
mix of qualitative (Socio-demographic) and quantitative (financial, loan
8. 100 Transaction Costs and Efficiency
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
parameters, etc), which were significant in determining defaults. In the
next section we present a simple model that exemplifies the treatment of
transaction costs.
Model of Delinquency
Ideally three sets of variables have significant influence on a borrower’s
default behavior. The operational variables include two categories of vari-
ables; loan characteristics and borrower characteristics. The loan char-
acteristic information is available with the bank where as the borrower
transaction characteristics need to be collected. The traditional variables
include MOB (Account Age on Books), Limit (Credit Limit of the bor-
rower), Pmt (Last Payment Amount), PDelinq (Previous Delinquent
Amount), Charges (Total Fees & Charges), Age (Borrower’s Age), Size
(Size of the Borrower’s Family), etc. The transaction costs variable in-
cludes information such as Home (Current Home Ownership Type of the
borrower), Profession (Current Major Source of Income of the borrower),
Total Loan Amt (Total existing Loan Amount of the borrower), etc.
The proposed model attempts to consider both the screening effect
of identifying and eliminating delinquent borrowers (William, 1991) and
also the credit expansion effect of the lender increasing the loan limit for
a given borrower. The probability of delinquency, which is a delinquency
score, can help in screening borrowers. This delinquency score estimation
approach is easy to understand and to implement by the bank. We use a
simple probit model where the delinquent is first timer and assuming a
logit distribution for delinquency, the null hypotheses are given below;
H0: A model of borrower delinquency that includes both the traditional
and transaction variables will have higher explanatory power than
a model based only on traditional variables.
HA: A model of borrower delinquency that includes both the traditional
and transaction variables will have equal explanatory power than a
model based only on traditional variables.
Data & Results
The sample data includes randomly drawn 86,799 accounts (3,467 delin-
quent accounts and 83,332 non delinquent accounts) of both delinquent
and non delinquent borrowers observed between the periods from April
2006 to March 2007. This data includes loan performance data on the ac-
9. 101 Bag
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
counts on both delinquent and non delinquent borrows for a period of 14
months. It includes (as mentioned earlier) traditional information on the
borrowers such as gender, education, marital status, and borrower’s age,
family size, etc. The bank has their performance information such as age
on books, last payment amount, credit limit, fees and charges, delinquency
status (Di = 1 or 0), etc. We use the home ownership type and profession
(major source of income) as transaction information which pertains to the
information from an external source. The external source can provide re-
cently authenticated profession or (primary source of income) information
with respect to the borrower such as in case of small businesses, industry
category (Manufacturing, Trading, Service Industry, etc), self employed
(Hospitality, Medical, Consulting, Interior Design & Contractors, etc). For
employed borrowers, it includes whether they are salaried in IT, MNC,
Non-MNC, Government Service, Teaching, Education or Home Makers,
etc. In today’s economy, borrowers change their profession type (major
source of income) and hence an external source would authenticate them.
Similarly, borrowers move from their paternal family home to stay in an
employer housing or to a self owned home or may be in rented accom-
modation. In fact, the market value of a self owned home or the rent paid
provides a better indicator of credit worthiness than just the home owner-
ship type, which has not been considered in our analysis.
Table 1: Sample Summary Statistics
Variable Mean (Rs.)
Standard
Deviation(Rs.)
Minimum(Rs.) Maximum(Rs.)
Credit Limit (Rs.) 1,57,110 64,940 0 20,00,000
Payment Amount (Rs.) 9,257 20,116 0 901,720
Total Fees & Charges (Rs.) 92 344 0 25,925
Age of Borrower (Years) 41 11 9 85
Age on Books (Months) 31 21 0 75
Delinquency (%) 4.50% 20% 0% 100%
Total (=86,799)
Delin-
quents
= 3,467
Non Delin-
quents
= 83,332
Source: Test data on Revolving Assets for Indian Bank (2006-2007)
We apply ordinal indicator transformation to the joint information of home
10. 102 Transaction Costs and Efficiency
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
ownership and profession while estimating for the delinquency in the test
data. Table 1 gives the profile of the test sample population. This average
delinquency rate of 4.5% against an average credit limit of Rs. 1,50,388
and month on book (MOB) of 37 months. The average payment rate in
the sample is 8% over the credit limit. We observe a good distribution of
the population characteristics in our sample. For example, Borrower Age
varies from 9 to 85, Credit Limit from 0 to Rs. 20, 00,000 and age on book
(MOB) 0 to 75 months, and Total Fees and Charges from 0 to Rs. 25,925,
etc. These variations represent the characteristics of a larger true popu-
lation (asymptotic) in the random test sample data. The variables, Age
on Book (MOB), Credit Limit (CL), Total Fee Charges (Charges), Pay-
ment Amount (PmtAmt) and Age of the Borrower, etc. are the information
available within the bank. Total existing loan amount (Total Loan Amt) is
an important attribute that represents the aggregate transaction relation-
ship of the borrowers across all lenders which could not be used in our
analysis because of non availability of data. Banks do not use home own-
ership type as a criteria to grant revolving credit and we observe a distribu-
tion of all categories of home ownership types in the data. As mentioned
earlier, banks do use income of the borrower to grant credit and there may
be some degree of association between home ownership type and income.
However, it is possible that the reported income may be relatively lower
for a borrower residing in own home. This reflects the presence of high
transaction costs between the lender and borrower. The Base Model is fit-
ted with the internal attributes alone and Transaction model is fitted with
all the nine attributes. Table 2 provides the results of the model fitting.
No multi-co linearity was detected within the model attributes, as shown
in the Annexure. The Base (traditional) model, having two attributes is
compared with a Transaction model with three attributes. The attribute in
the second model called, Home Ownership_Profesion is a joint indicator
of two attributes, Home Ownership and Profession. As shown here, in-
corporation of the transaction information (Home Ownership Profession)
gives higher predictive power (K-S) to the delinquency model here. The
AIC (Akaike Information), SC (Schwartz) and LL (Log Likelihood) infor-
mation criterion does improve after the incorporation of external attribute.
11. 103 Bag
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
Table 2: Model Estimates and Comparison
Criterion Base Model Transaction Model
AIC (Akaike Information) 28,169 28,105
SC (Schwartz) 28,197 28,143
-2 Log L (Log Likelihood) 28,163 28,097
Concordant (%) 63 65
Discordant (%) 37 35
Somers’ D 0.341 0.353
Gamma 0.365 0.372
Tau-a 0.026 0.027
c 0.671 0.677
Parameters*
Model Variable Base Model Transaction Model
Intercept -2.55E+00 -2.81E+00
Credit Limit -5.10E-06 -5.26E-06
Total Fee Charges 9.08E-04 9.04E-04
Home Ownership_Profession 6.17E-02
*Chi-square Values are significant at 99.99%
Chart 1: Power of Transaction Model over Base Model
12. 104 Transaction Costs and Efficiency
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
Chart 1 compares the power curve of both the models. As shown in the
Chart 1 here, the power (predictive power) of a ‘Transaction model’ with
transaction information is higher than a ‘Base Model’. This means that
(during a sorted draw of the sample from a population) a transaction costs
model is more likely to identify more number of delinquent borrowers
than compared to a Base Model, accurately. The model performance of
both the models is compared in 10 deciles. The transaction model pro-
vides a Maximum KS of 29.39 (against a Maximum KS of 27.25 for the
Base Model), but also accurately captures higher percentage of the delin-
quent accounts from the second deciles onwards. Kolmogorov-Sminrov
(KS) measures the distance between the cumulative bad (delinquent) rate
(%) and cumulative good (non delinquent) rate (%) and hence is a predic-
tive measure. Table 2 provides the model parameter estimates for both
the models including comparison against the global model parameters.
As shown in Table 2, we compare the AIC, SC and -2 LogL (information
criterion) values for both the models and in line with theory we find rise
in model information due to the positive attribute. It is worth mentioning
the fact that banks do not use profession as a filter to grant credit to new
borrowers and therefore we observe a distribution across all categories
of profession. Banks use income of the borrower to grant him credit as
well as credit limit. There may be some degree of association between
profession and income for a given geography. However, the random sam-
ple drawn from the entire portfolio of the bank may not confirm this fact
of association between profession and income. Similarly, the transaction
model depicts a higher concordance value (65%) and ‘c’ value (0.677)
over the Base Model. The model parameter estimates are significant at
99.99 % confidence. The parameter against Credit Limit reduces from
(-5.1) to (-5.26) which means that the weights against the credit limit are
lower by 3.25%. The reduction in the weights against Credit Limit means
the borrower is eligible for higher limit now since the likelihood of de-
linquency has gone down. The parameter against total fees and charges
reduces from (9.08) to (9.04), which means that the weights against the
total Fees & charges are lower by 5%. The total fees and charges are high-
er for higher month on books than recent accounts. Accounts that are of
higher age on books, the expected delinquency is lower now which means
13. 105 Bag
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
the transaction costs have fallen. To understand the significance of the
overlap (intersection) between the home ownership and profession, we
conduct a cross tabulation analysis presented in Table 4. Since a good
proportion of delinquent borrowers (40%) are non salaried and residing in
rented homes their expected delinquency is lower than that of self owned
and salaried borrowers. Similarly, as compared to a situation where the
borrower’s home ownership-profession has not been used, the likelihood
of delinquency increases. It is true that the bank has taken into considera-
tion the income of the borrower but information regarding his wealth such
as ownership or profession can provide the bank useful information to
maintain its portfolio delinquency rate. This obviously implies that banks
need not deny credit to applicants based on their ownership or profession,
but they can fix the line amount to new borrowers so as to maintain their
portfolio delinquency rates at a given level. This shows the sensitivity to
delinquency is lower meaning that better screening makes delinquency
less sensitive to loan size than it was before.
Conclusions and Policy Implications
The purpose of this study was to explore the possibility of reducing trans-
action costs in lending in an empirical study on the usage of transaction
information. We established their efficacy and confirmed that transaction
costs could be reduced using tools of information as a practical example
for a bank. We proposed a simple model of information costs to analyze
the impact of positive borrower information on his/her eligibility to obtain
greater credit limit (loan limit) and also its benefits on the overall portfolio
of the bank due to reduced delinquency rates. Our empirical results, also
confirmed in earlier studies, suggest that a strong screening effect of less
credit unworthy borrowers is achieved by giving weights to home profes-
sion element. Further, a credit expansion effect i.e., higher loan eligibility
of the borrowers; due to lower risk weights given to credit line amount is
crated in the presence of home ownership and profession element. These
results are in line with previous empirical findings (Pagano, 2003, Luoto,
Bag, 2012). In presence of relational information, certain costs such as
screening and monitoring are likely to decrease (Luoto, Williamson). The
existence of relationship information about the borrower performance is
also necessary for future loans.
14. 106 Transaction Costs and Efficiency
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
There exist two policy implications of these findings here. The first
policy implication is the immediate need for setting up an active, dynamic,
vibrant and far reaching, accessible credit information system in the In-
dian economy. The second policy implication is the need for facilitating
a necessary mechanism for information sharing, transmission and popu-
larization, in terms of the responsibilities of the various stake holders such
as banks, lenders, borrowers and the government or other regulators. The
pricing of the credit data from a credit information system (CIS) should be
cheaper for each lender to make complete and timely use of it. An effec-
tive credit information system can be integral to the operation of modern
financial systems. Credit information systems can include a number of
functions, including collecting, analyzing, and distributing information
about how consumers and businesses, large and small, handle their credit
obligations. A sound environment for managing credit requires reasonable
access to accurate, reliable and current credit information on borrowers
that affords adequate protection and safeguards for the privacy of borrow-
ers and which is governed by general rules of due process. Thus, the goals
of financial inclusion and efficient monetary transmission can be achieved
by expanding the credit eligibility of a large population of our country
with the help of such foot prints and also expanding credit which is a
financial goal of banks. Growing competition among banks in the Indian
market will make it tough for this to happen. However, it is high time that
India becomes a developed financial market with the existence of a credit
bureau, CIBIL. It provides limited data on borrowers such as outstanding
loan amount and delinquencies, payment history, etc. CIBIL has already
demonstrated the power of credit information with few US Bureaus (e.g.
Trans Union Inc.). It is a good beginning but has a long way to go to fulfill
the desires of bank’s risk managers. A true test of the positive welfare
enhancing effects of CIBIL can only happen when banks in India conduct
their portfolio delinquency rates comparison between pre-CIBIL and post-
CIBIL usage scenario.
END NOTE
1. Moral hazard arises because of the lack of transparency in the behav-
ior of individual borrower leaving the Bank to face the consequences
of the borrowers’ actions.
15. 107 Bag
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
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17. 109 Bag
Journal of Services Research, Volume 13, Number 1 (April - September 2013)
Annexure
Collinearity Diagnostics
Proportion of Variation
Condition
Number Eigen value Index Intercept Credit Limit Tot_Fee_Chg
1 2.05365 1 0.03155 0.03154 0.04951
2 0.87053 1.53593 0.00936 0.00893 0.95033
3 0.07582 5.20427 0.95909 0.95953 0.0001627
Parameter
Variable Estimate t Value
Variance In-
flation Factor
Probability
Intercept 0.05175 19.77 <.0001 0
home -0.00451 -5.28 <.0001 1.0451
Profession 0.00711 11.62 <.0001 1.00775
Credit_Limit -1.20E-07 -11.55 <.0001 1.05369
Tot_Fee_Chg 0.00007276 37.86 <.0001 1.00776
18. RNI NO. : HARENG/2001/4615 ISSN NO. : 0972-4702
Institute for International Management and Technology
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Phone: (0124) - 4787111 Fax: (0124) - 2397288
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