Collateral and its substitutes in emerging markets’ lending

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Collateral and its Substitutes in Emerging Markets' Lending Abstract Due to opaque information and weak enforcement in emerging loan markets, the need for collateral is high, whereas borrowers lack adequate assets to pledge as collateral. How is this puzzle solved? We find for a representative sample from Northeast Thailand that indeed most loans do not include any tangible assets as collateral. Instead, lenders enforce collateral-free loans through third-party guarantees and relationship lending, but also through modifying loan terms, such as reducing loan size. Guarantees are the relatively most important substitute, they reduce collateral requirements independently of relationship lending and they are more often used by formal financial institutions. Terms of use: Documents in EconStor mayJEL-Code: G210, O160.

Does bank ownership affect relationship lending: A developing country perspective

“…Empirical research show that large foreign banks use more arms-length lending, which reduces collateral requirements for SMEs (Jimenez et al, 2006). On the other hand, Menkhoff et al (2012) confirmed that banks use collateral to secure their capital from the bad loans and hence, as private banks are smaller in size, as a result, they are more concerned about the reduction of any loan losses which may occur from loan defaults. On top of that, use of the soft information may not always correctly generate accurate credit risk level of the borrower because of the soft information interpretation errors and hence, banks use collateral to minimize moral hazard in SME lending (D'Aurizio et al, 2015).…”

“…Nevertheless, private banks are superior in the soft information based lending and it may allow them to ask for more collateral from the SMEs to increase their superiority on the loan contract, as by nature relationship banking is risky. Moreover, some authors also suggest that small banks ask for more collateral from the SMEs than the large banks in emerging markets due to their capital shortages and also loan loss reduction incentives (Menkhoff et al, 2012). Taking this information into consideration we can also argue that the majority of the private banks in Bangladesh is small in comparison to the government-owned or foreign banks and, as a result, private banks can ask for more collateral from the SMEs than the government or foreign banks.…”

The role of demographics in small business loan pricing

“…For U.S. consumer loans, Chakravarty and Scott (1999) found a negative influence of the borrower's age on loan rates. For consumer loans in Thailand, Menkhoff et al (2012) found no significant influence of the borrower's age on collateral. For Germany, Reifner (2005) observes that loans to older people are inflexible, expensive or unreachable, which applies above all to their mainly used mortgage loans, credit lines, installment loans and consumption loans.…”

Collateral requirements of SMEs: The evidence from less-developed countries

“…Our main result indicates that country-specific variables are more important than firm-specific variables for determining both the presence and the degree of collateral for a loan. Accordingly, we find that not all of the borrower's characteristics 3 Using data from Thailand, Menkhoff et al (2012) reveal that a lack of collateral is resolved through the use of substitutes for collateral, such as relationship lending, the modification of loan terms (e.g., reductions in loan size), and the inclusion of third-party guarantees.…”