Has previous loan rejection scarred firms from applying for loans during Covid-19?

The concept of the ‘discouraged’ borrower is well documented. In this paper, we consider whether smaller firms in the UK who have been previously rejected for bank loans have been scarred by the experience so badly that even in the presence of two exceptionally generous Covid-19 loan guarantee schemes, they still refuse to make an application. Furthermore, we also consider what happens when they do. As banks have either zero or minimal loss exposure, do they still maintain their normal strict lending protocols or do they relax their standards to fulfil the governments’ objective of supporting struggling businesses through the crisis? Our findings show that 72% of previously rejected borrowers are reluctant to request loans. We find some evidence that previously scarred firms faced such severe liquidity problems that they relaxed their distrust of banks during the Covid-19 crisis. However, their share of the government-guaranteed loan portfolio was slightly lower suggesting that banks were treating each new loan application on its merits. Plain English Summary The Covid-19 crisis hit smaller businesses so hard that even previously rejected borrowers were forced to apply for loans to keep them afloat. Previous loan rejections have not discouraged small businesses in the UK in applying for Covid-19 government-guaranteed loans. Banks have used the loan guarantee schemes to continue to supply loans to small business during the pandemic. Our paper analyses the important phenomenon of borrower scarring and discouragement, when potential debtors are self-excluded from the lending market because they have previous rejections or expect a negative bank response. We consider around 45,000 UK small businesses from 2018 to 2020. On the demand side, we find that the economic shock for small businesses during the pandemic dissipates the scarring effect. Specifically, we find that micro and small businesses had the highest loan demand in the first two quarters of the pandemic (from March 2020). On the supply side, we show that scarred borrowers were not routed onto Covid-19 government-guaranteed loan schemes. These findings show the importance of government-backed lending schemes for small businesses during crisis period.

Prior credit assessment of long-term SME projects with non-standard cash flows

Over the past three decades, the relative bank loan demand has changed due to the arising small and medium-sized enterprises (SMEs). Therefore, banks in their operations face the problem of processing an ever-increasing number of loan applications. The aim of this paper is to develop an auxiliary approach to assessing the prior creditworthiness of long-term SME projects with nonstandard cash flows.This study reveals how the principles of value-based management can be incorporated into the process of borrower’s creditworthiness assessment to improve the process of screening loan applications. For this, the internal rate of return was used as a criterion for loan granting decision at the initial stage of loan underwriting.An algorithm for the preliminary evaluation of loan applications is proposed and is based on the principle of maximizing the shareholder value of banks. This algorithm helps to define the credit terms taking into consideration the distribution of positive cash flows throughout the project’s expected economic life, calculate the possible real effective interest rate concerning the borrower’s nonstandard cash flow schedule, make a rough analysis on the economic efficiency of lending and state the necessary criterion to initiate the procedure of loan underwriting for the projects with nonstandard cash flow schedules. The proposed estimation algorithm stemming from the IRR-approach for the cash flow analysis can also be initially used by a borrower as a tool for credit solvency self-testing via screening of periods with corresponding cash flows that can be used for loan servicing.

Unternehmenskreditgeschäft der Sparkassen – ein stabilisierendes Element in der Coronakrise: Branchen- und regionalspezifische Implikationen

Die Coronapandemie hatte einschneidende Auswirkungen auf die Realwirtschaft. Dennoch ist die Kreditnachfrage von Unternehmen und Selbstständigen bisher nicht zurückgegangen, sondern gestiegen. Vor allem Sparkassen erwiesen sich durch ihre überdurchschnittliche Kreditvergabe als stabilisierendes Element in der Krise. Deren Kreditwachstum war ab September 2020 sowohl in Geschäftsgebieten mit einer hohen und mittleren, als auch mit einer niedrigen Wirtschaftskraft im Mittel höher als das Marktwachstum. Auch in nahezu allen Branchen stiegen die Kreditvolumina, der stärkste Anstieg ging vom Wohnungs- und Grundstückswesen aus. Nach der Coronapandemie ist es nun entscheidend, die Unternehmen durch wachstumsorientierte Förderprogramme in den notwendigen technologischen Anpassungsprozessen (z. B. bei der Digitalisierung und Nachhaltigkeit) zu unterstützen. Gleichzeitig ist es für die weitere erfolgreiche Zusammenarbeit von Sparkassen und Unternehmen auch in Zukunft unerlässlich, ein vielfältiges, ausdifferenziertes Bankensystem in Deutschland zu erhalten. The corona pandemic has had a major impact on the real economy. Nevertheless, the loan demand from companies and the self-employed has so far not declined but increased. Savings banks in particular have proven to be a stabilizing element in crisis due to their above-average lending. As of September 2020, their loan growth in business areas with high, medium as well as low economic strength was on average higher than the market growth. Lending volumes also rose in almost all sectors, with the largest increase coming from housing and real estate. After the corona pandemic, it is crucial to support companies in the necessary technological adaptation processes (e. g. in digitalization and sustainability) through growth-oriented funding programs. To ensure a continued successful cooperation between savings banks and companies it is important to maintain a diverse, differentiated banking system in Germany.

EXPRESS: How Does Bonus Payment Affect the Demand for Auto Loans and Their Delinquency?

This paper studies how receiving a bonus changes the consumers’ demand for auto loans and the risk of future delinquency. Unlike traditional consumer products, auto loans have a long-term impact on consumers’ financial state because of the monthly payment obligation. Using a large consumer panel data set of credit and employment information, the authors find that receiving a bonus increases auto loan demand by 21 percent. These loans, however, are associated with higher risk, as the delinquency rate increases by 18.5 −31.4 percent depending on different measures. In contrast, an increase in consumers’ base salary will increase the demand for auto loans but not the delinquency. By comparing consumers with bonuses with those without bonuses, the authors find that bonus payments lead to both demand expansion and demand shifting on auto loans. The empirical findings help shed light on how consumers make financial decisions and have important implications for financial institutions on when demand for auto loans and the associated risk arise.

Monitoring in Originate-to-Distribute Lending: Reputation versus Skin in the Game

Banks face liquidity and capital pressures that favor selling off the loans they originate, but loan sales undermine their monitoring incentives. A bank’s loan default history is a noisy measure of its past monitoring choices, which can serve as a reputation mechanism to incentivize current monitoring. In equilibrium, higher reputation banks monitor (weakly) more intensively; if retention is credible, they generally retain less of the loans they originate. Monitoring is difficult to sustain in periods with uncommonly large spikes in loan demand (“booms”), especially for low-reputation banks, which are more likely to accommodate boom demand and forgo monitoring.

SPK Pemberian Pinjaman dalam Upaya Mengantisipasi Kredit Macet pada Anggota Koperasi Studi Kasus: KSP Warna Artha

Cooperative Savings and Loans is one type of cooperative in Indonesia that has the main activity is to provide storage services and loan funds to members of the cooperative with the aim of advancing the welfare of members in particular and society in general. From that base, it can be seen that cooperatives contain two elements, namely economic elements and social elements related to each other. It is said to have an economic element because the purpose of the cooperative itself is to achieve the welfare of members. The loan facility in the Artha Color cooperative has a high risk of non-performing loans or bad loans. The incidence of further problem loans may result in difficulties from the cooperative. This study aims to analyze the procedure of granting small and medium business loans and employee loans. The subjects of this research are staff of Artha Color Cooperative employees and members of Artha Color Cooperative. The object of his research is the analysis of the determination of lending employees to members of the cooperative. The data collected by interview method, observation and documentation are then analyzed by Quantitative Descriptive Analysis. The results showed that lending procedures to members of the cooperative has been well implemented starting from the submission of loan demand, analysis of guarantee files, conducting surveys, studying loan files, to disbursement of credit.