Emerging Economies and Speedy Payday Loans

banking sectorIntroduction

A major problem being observed all over the world in the banking sector is problem of bad loans. First step of building a stable and strong financial system is to minimize non-performing loans. According to World Bank, non-performing loans as proportion of total loans is 24..6 % for Ireland, 31.3 % for Greece, 9.5 % for Egypt, 6% for Russia, 3.6% for South Africa, 3.2% for USA, 2.9 % for Brazil and 1% for China. Non-performing loans have been huge concern for al the nations across the globe. Since the introduction of financial sector reforms in 1992 and second phase of reforms in 1998, the recovery of non-performing assets is considered as one of the biggest problems for the entire banking industry in India. The high level of Non-Performing Assets (NPAs) taints the overall portfolio but puts a burden on the income statement of banks in the form of higher provisions. The earning capacity and profitability of many banks are adversely affected by the high level of NPAs. Though it is not possible to have zero NPAs, a proper understanding of NPAs is required to manage them, with a view to keeping them under control. To understand NPAs, it becomes imperative to understand the determinants of NPAs both from the regulatory as well as managerial angles. For the regulator, NPAs are crucial since they constitute the first trigger of banking crises. For the bank manager, NPAs reduces the bank’s profitability, as banks are not allowed to book income on NPAs and, at the same time, required to make provision for such accounts as per the regulator’s guidelines. Moreover, managerial and financial resources of the bank are diverted towards resolution of NPA problem causing lost opportunities for more productive use of resources. A bank saddled with NPAs might tend to become risk averse in making new loans, particularly to SMEs. Hence an attempt is made to understand the determinants of the performance of the banks based on asset quality measured by the level of non-performing assets in a bank subsequent to the recommendations made in Narasimham committee report and Global financial turmoil.

Previous Research and Research Questions

Empirical studies using static econometric models

In the banking literature, the problem of NPAs has been revisited in several theoretical and empirical studies. Rajaraman, Bhaumik and Bhatia explained variations in NPAs across Indian banks through differences in operating efficiency, solvency and regional concentration. A considered view is that banks’ lending policy could have crucial influence on non-performing loans. Reddy critically examined various issues pertaining to terms of credit of Indian banks. In this context, it was viewed that ‘the element of power has no bearing on the illegal activity. A default is not entirely an irrational decision. Rather a defaulter takes into account probabilistic assessment of various costs and benefits of his decision’. Mohan emphasized on key lending terms of credit, such as maturity and interest-terms of loans to corporate sector. The Indian viewpoint alluding to the concepts of ‘credit culture’ owing to Reddy has an international perspective since several studies in the banking literature agree that banks’ lending policy is a major driver of non-performing loans [McGoven, Bloem and Gorters ].The problem of NPAs is related to several internal factors and external factors confronting the borrowers. As to speak about borrowing the service Speedy Payday Loans and speedy-payday-loans.com is everything you need to achieve the stated goals.

The internal factors such as business (product, marketing, etc.) failure, inefficient management, strained labour relations, inappropriate technology/technical problems and external factors such as recession, non-payment in other countries, inputs/power shortage, price escalation, accidents and natural calamities. Rajaraman and Vasishtha in an empirical study provided an evidence of significant bivariate relationship between an operating inefficiency indicator and the problem loans of public sector banks. strong financial systemSaurina using panel data on Spanish commercial and saving banks, revealed that various macroeconomic and bank specific factors such as growth in GDP, rapid credit expansion, bank size and capital adequacy ratio influenced the Non-Performing Loans. Berger and Udell suggested that the time lapse between successive loan bust periods could be a contributing factor for banks to accumulate bad loans in the future and this could be due to the high turn-over of credit officers in the banking system due to various reasons. The pro-cyclical nature of the accumulation of bad loans is due to the fact that during the bust times, the value of collateral erodes and there is an overall decline in the credit standards. Hu et a.l, found an inverse relationship between bank size and NPLs. Their argument is that large banks have better risk management strategies that usually translate into more superior loan portfolios than their smaller counterparts. Hu et al. also found that the banks with higher government ownership recorded lower non-performing loans.

Empirical studies using dynamic econometric models

At this point we must stress, that the above studies do not take into account the dynamism which influences incidence of NPAs. First, Salas and Saurina have modelled the problem loans ratio of Spanish banks in order to gauge the impact of loan growth policy on bad loans. They were interested in capturing the lag between credit expansion and the emergence of problem loans. Using panel data, they compared the determinants of problem loans of Spanish commercial and savings banks in the period 1985-1997, taking into account both macroeconomic and individual bank level variables. The GDP growth rate, firms, and family indebtedness, rapid past credit or branch expansion, inefficiency, portfolio composition, size, net interest margin, capital ratio, and market power are variables that explain credit risk. However, there are significant differences between commercial and savings banks, which confirm the relevance of the institutional form in the management of credit risk. Their findings raise important bank supervisory policy issues: the use of bank level variables as early warning indicators, the advantages of bank mergers from different regions, and the role of banking competition and ownership in determining credit risk.

Das and Ghosh examined the factors affecting problem loans of Indian state owned banks for the period 1994-2005, considering dependent lagged variable, macro and bank specific variables influencing NPAs. They found that GDP growth rate at macro level and loan growth rate, operating expenses and bank size at bank level play an important role in influencing problem loans. Speedy Payday Loans is the service which does not demand any documents to take a loan that’s why the time comes to leave an application to receive approval.

Thiagarajan et al, carried out a study to predict the determinants of the credit risk in the Indian commercial banking sector by using an econometric model by utilizing a panel data at bank level for 22 public sector banks and 15 private sector banks. They have shown that the lagged non-performing assets had a strong and statistically significant positive influence on the current non-performing assets. There is a significant inverse relationship between the GDP and the credit risk for both public and private sector banks.

In conclusion, the studies which are focused on factors influencing the problem loans of banks, using static or dynamic models are numerous. For this reason, the following table presents some empirical studies and the factors which are identified as responsible for the problem loans.

Though significant research was undertaken to understand problem loans, impact of global financial crisis on problem loans in Indian context is untouched. Further, impact of bank-specific and macroeconomic variables along with ownership of banks on NPAs is revisited using latest data from 2001- 2012.