PERCEIVED LOAN RISK AND EX POST DEFAULT OUTCOME: ARE THE BANKS’ LOAN SCREENING CRITERIA EFFICIENT?
Journal Title: Asian Economic and Financial Review - Year 2013, Vol 3, Issue 8
Abstract
Prospective borrowers from commercial banks are usually made to pass through stringent lending procedure. The screening procedure is intended to forestall likely default intents and reduce credit risks. Banks, through the analysis are able to predict the inherent risk level in the loans they administer and avoid risky borrowers. The recent rise in defaults rates and the size of non-performing loans among the Nigerian commercial banks therefore puts to question the efficiency of the banking system screening criteria. An efficient screening technique is expected to approximate the estimated and the ex post default risk outcome. Disparities between the two reflect the extent by which the assessment of risks by banks was inefficient. This paper provides evidence that bank screening criteria do not effectively foreclose total default risk, and affirm that perceived and ex-post default risks differ. Using data obtained from a survey of investment loans made to 210 borrowers between 2000 and 2012 among 15 commercial banks in Nigeria, this study observed that the banks’ screening criteria was limited by the presence of information asymmetry. Adverse selection and moral hazard were observed to persist in the loan markets irrespective of the stringency of the banks’ screening measures. The observed difference between estimated and ex-post default risk incidence arise because of the presence of information asymmetry.
Authors and Affiliations
C. Chris Ofonyelu| Economics Department, Adekunle Ajasin University, Akungba-Akoko, Nigeria, R. Santos Alimi| Economics Department, Adekunle Ajasin University, Akungba-Akoko, Nigeria
Keywords
Related Articles
- EP ID EP1940
- DOI -
- Views 2122
- Downloads 262
RELATIONSHIP BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH, EVIDENCE FROM FINANCIAL CRISIS
This research studies the influence of financial development on economic growth with emphasis on the recent financial crisis. Variables considered in this study are indicators of financial development consisting of the r...
ECONOMIES OF SCALE AND ALLOCATIVE EFFICIENCY OF RICE FARMING AT WEST SERAM REGENCY, MALUKU PROVINCE, INDONESIA
Economies of scale and allocative efficiency of rice farming has been conducted in technical irrigated field at Kabupaten Seram Bagian Barat – SBB (West Seram Regency), Province of Maluku. This study has the objectives t...
OPTIMAL TAX POLICY – FINANCIAL CRISIS OVERCOMING FACTOR
Among economic reforms implemented for overcoming of world financial and economic recessions the special accent is brought to macroeconomic stabilization; strengthening of financial sphere is recognized one of imperative...
CAUSALITY BETWEEN OIL CONSUMPTION AND ECONOMIC GROWTH IN IRAN: AN ARDL TESTING APPROACH
Oil is also very important for the Iran’s economic growth. This paper studies the causal relationships between oil consumption and economic growth for Iran using cointegration and error correction model from annual data...
GOVERNMENT REVENUE AND EXPENDITURE IN NIGERIA: A DISAGGREGATED ANALYSIS
This paper examined the relationship between both total (TEXP) and disaggregated government expenditure (current (TREXP) and capital expenditures (TCEXP)), and total (TREV) and disaggregated revenue (oil (OILREV) and non...