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Informal finance with usurious interest rates seems to be the last resort for the poor in many developing countries. In Thailand, informal credit lenders can freely set up extortionate interest rates and use controversial enforcement actions to pressure borrowers to repay loans, because that legal enforcement is not practical due to the low punishment levels for those lenders. Despite widespread interest in the determinants of the informal interest rates, it remains a largely unexplored area. This study investigates whether level of lenders' influence over the borrower, and some characteristics of the borrowers, are related to informal interest rates, enabling the rates to be classified into particular categories. Ordered logistic regression is used to analyze the data. The investigation was based on information collected in a survey presented to a sampled population of 694 participants from Bangkok, Nonthaburi, Phathum Thani, and Samut Prakan where the number of informal loans during the last seven years is highest when compared to other regions of the country. The results suggest that the level of lenders' influence over the borrower in order to obtain a loan correlates with the informal interest rates applied. Moreover, some characteristics of a borrower, i.e., debt-to-income ratio and high level of familiarity between an informal lender and a borrower, also significantly affect the rates. Keywords Informal interest rates * Level of lenders' influence * Informal loan JEL Classification E40, Introduction For a long time, governments have attempted to create programs to distribute subsidized credits to people in a country, but in practice, the poor tend to have a higher [...]

Testing for discrimination in mortgage lending requires classifying consumers into treatment and control groups. Classification is quite complicated, because Home Mortgage Disclosure Act (HMDA) data, the primary source of data for these analyses, contain information on the ethnicity, race, and gender for both primary and coapplicants. In addition, applicants have the option of reporting multiple races. Using these detailed data to construct standard groups, such as 'Black,' 'Hispanic,' and 'White,' requires subjective decisions on how to aggregate applications. This study uses a data-driven approach to classify applications, minimizing subjectivity. Using HMDA data, as well as data from a recent examination conducted by the Office of the Comptroller of the Currency, we disaggregated applications into the most basic subsets possible. Our objectives are to better understand the characteristics of applicants, analyze variation in denial rates across underlying subsets of applications, and develop a data-driven classification strategy feasible for fair lending analyses. Keywords: Discrimination, fair lending, classification DOI 10.3233/JEM-2010-0335

We investigate the incremental roles of information that becomes available only after a revolving loan has been granted in explaining and predicting the time taken until the borrower makes a second purchase. Using data relating to a store card, granted around the time of first purchase and used in Belgium, we find that characteristics of a first purchase and remaining credit available for use enhance the explanatory and predictive power of application characteristics. The relationship differs between good and poor payers. Journal of the Operational Research Society (2005) 56, 1041-1050. doi:10.1057/palgrave.jors.2601933 Published online 16 February 2005 Keywords: credit scoring; survival analysis; risk; banking

We develop a general model of lending in the presence of endogenous borrowing constraints. Borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced. In the model, the dynamics of debt are closely linked with the dynamics of borrowing constraints. In fact, borrowing constraints must satisfy a dynamic consistency requirement: the value of outstanding debt restricts current access to short-term capital, but is itself determined by future access to credit. This dynamic consistency is hot guaranteed in models of exogenous borrowing constraints, where the ability to raise short-term capital is limited by some prespecified function of debt. We characterize the optimal default-free contract--which minimizes borrowing constraints at all histories--and derive implications for firm growth, survival, leverage and debt maturity. The model is qualitatively consistent with stylized facts on the growth and survival of firms. Comparative statics with respect to technology and default constraints are derived.

In an environment with correlated returns, this paper characterizes optimal lending contracts when the bank faces adverse selection and borrowers have limited liability. Group lending contracts are shown to be dominated by revelation mechanisms which do not use the ex post observability of the partners' performances. However, when collusion between borrowers under complete information is allowed, group lending contracts are optimal in the class of simple revelation mechanisms (which elicit only the borrower's own private information) and remain useful with extended revelation mechanisms. JEL classification: D8; G2; O12; O17 Keywords: Group lending; Adverse selection; Collusion; Development

Research into the traditional service on loans and deposit taking by banks is given. This article argues that the two services are manifestations of one primitive function, whereby the researchers develop a model to test this theory.

We compare the performance of markets and tournaments as allocative mechanisms in an economy with borrowing constraints. The economy consists of a continuum of individuals who differ in their initial wealth and ability level. These must be assigned to a continuum of investment opportunities or inputs of different productivity. With perfect capital markets matching is efficient under both mechanisms. Markets, however, generate higher aggregate consumption because of the waste associated with the production of signals under tournaments. When borrowing constraints are present, tournaments dominate markets in terms of matching efficiency and, for sufficiently powerful signalling technologies, also in terms of aggregate consumption.

This paper analyzes the repayment rates of 128 credit groups belonging to three group-based credit programs in Bangladesh: the Association for Social Advancement (ASA), the Bangladesh Rural Advancement Committee (BRAC), and the Rangpur Dinajpur Rural Service (RDRS). Using TOBIT analysis, specific tests are performed on the following hypothesized determinants: group size, size of loans, degree of loan rationing, enterprise mix within groups, demographic characteristics, social ties and status, and occurrence of idiosyncratic shocks. The paper concludes that if basic principles of prudential banking are adhered to, repayment rates can be good even in poor and remote communities. The important thing for financial institutions is to tailor services such that it becomes worthwhile for the poor to establish a profitable long-term association. In addition, more freedom to members in the process of group formation is recommended. Key words - credit groups, Bangladesh, repayment, finance, real, Tobit

An endogenous growth model is used where an informational asymmetry exists between capital producing borrowers and lenders regarding the borrower's ability to operate an investment project successfully. Either by rationing a fraction of borrowers or by utilizing an expensive screening technology, or using a combination of the two, the lender can begin self-selection. The growth rate of output is shown to have lowered with decreased screening cost. The advantage of an advanced financial sector in a higher growth rate is only shown when a certain level of sophistication is achieved.

Access to credit in a developing economy experiencing inflation is dependent of a wide range of variables. These variables include the relationship of a certain economic class to existing lending institutions and the amount of liability such lending institutions possess. In capitalist economies, the state's liability serves as the primary link in money supply. To prove such observations, an analysis of the availability of credit of developing countries such as Yugoslavia was conducted.

Uninsurable income risk and future borrowing constraints tend to decrease the financial assets of a household. Investors are found to diminish their risky assets in the face of uninsurable income risk. Data from the 1989 Bank of Italy Survey of Household Income and Wealth show that Italian households' risky assets form only a fraction of their wealth due to highly erratic returns, transaction costs and control of security markets, among others.

DEWAR M. E. and HAGENLOCKER B. (1996) Getting to the bottom line on low-interest loans to business: an evaluation of the Small Cities Economic Development Programme in Minnesota, Reg. Studies [...]

I. Introduction This paper examines the extent to which differences in workers' rates of time preferences can explain pension coverage outcomes. We argue that workers with a high rate of [...]

Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender's incentives to do this. Thus loan contracts must be structured to enhance the lender's incentives to monitor. Covenants make a loan's effective maturity, and the ability to collateralize makes a loan's effective priority, contingent on monitoring by the lender. Thus both covenants and collateral can be motivated as contractual devices that increase a lender's incentive to monitor. These results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending. (Reprinted by permission of the publisher.)

Previous research demonstrates that a firm's common stock price tend, to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns, This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although we find no significant difference between the market's response to bank and nonbank loans, we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived 'quality' signals valuable information about finn value to uninformed market investors., Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although we find no significant difference between the market's response to bank and nonbank loans, we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived 'quality' signals valuable information about firm value to uninformed market investors. (Reprinted by permission of the publisher.)

A study is presented that discusses optimal insurance and the formal equivalence of lending under private information. The study also shows that lending equilibria is identical even if differing income processes exist. In addition, the influence of interest rates and the serial correlation of the aggregate income process on potential insurance is discussed. The model used in the study is based on a linear-quadratic framework.

Some economists argue that models of adverse selection in loan markets can display market failures that rationalize a welfare-enhancing role for government intervention. Such models impose restrictive assumptions on the way agents interact. The same adverse selection models with a less restrictive definition of equilibrium display endogenous financial intermediaries and predict no welfare-enhancing role for the government.

Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written, or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation. (Reprinted by permission of the publisher.)

Loan Commitments and Optimal Monetary Policy THERE IS A GROWING RECOGNITION that standard models of the monetary policy process are "sterile" in that they oversimplify the role of bank credit. […]

It has been possible to produce empirical evidence that loan rates, collateral needs and credit availability may be explained by the theory of social interactions, as well as by the theories of financial intermediation and relationship lending. It has also been shown that loan rates do not depend on the duration of the lending relationship.

There has been an increase in the volume of required financial disclosures since 1975. This phenomenon is probably the result of a shift in emphasis from the use of financial statements as complete measures of net income and the market value of common stock to viewing financial statements as a source of information on which users base their own assessments of market value. Research indicates that supplemental data delineating risk in the areas of default, and interest rates explain the variations in the market-to-book ratios of common stocks of banks more than allowances for loan losses and conventional variables do. Non-performing loans are impaired to a greater degree than indicated by the allowance for loan losses, resulting in the capital markets assessing the market value of the loans below reported book value.

This paper examines dynamic information losses associated with loan terminations. We assume that the aggregated returns of current borrowers contain information about the mean returns to future borrowers. In a competitive loan market, the value of this information is not fully internalized by individual borrowers and lenders, and loan decisions fail to be first best. Introducing heterogeneous borrowers, who know their own risk characteristics better than lenders, safer borrowers are less willing to borrow when risk premia rise. As they cease borrowing, the information generated in credit markets becomes noisier and this tends to increase risk premia. The model produces alternating and persistent periods of 'tight' and 'loose' credit. (Reprinted by permission of the publisher.)

We provide a rationale for the presence of points in mortgage loan contracts. Our analysis builds on two key features. First, insurance markets are unavailable for labor income. Second, the 'due-on-sale' clause allows banks to offer loan contracts which partially insure against fluctuations in labor income. If explicit prepayment penalties are prohibited by law, points serve effectively as prepayment penalities. We also examine environments where such penalties are not prohibited and show that points will be used if interest rates cannot depend on the size of the loan. (Reprinted by permission of the publisher.)

The authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications. Both moral hazard and adverse selection are considered. The principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts. Specifically, some well-known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept. Two somewhat surprising results emerge. First, high-quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits. Second, high-quality borrowers may put up more collateral. (Reprinted by permission of the publisher.)

Measuring the Ability to Repay: The Residual Income Ratio Which of these observations about consumer indebtedness is correct? The answer depends largely on the method used to measure consumer debt. [...]

It was shown that the optimum quantity of debt will be significant if debt is effective in easing consumption over the lifetime of a person. The maximum quantity of debt will be insignificant if debt crowds out capital and, hence, decreases consumption. Or, it will be insignificant if the incentive impacts of higher distortionary taxes are vital.