presented to: ms. sana farooq presented by: sania moazzam 09u0153 thursday, april 04, 2013
TRANSCRIPT
CHARACTERISTICS THAT BANKS EVALUATE BEFORE EXTENDING LOANS TO BORROWERS
Presented to: Ms. Sana Farooq
Presented by: Sania Moazzam09U0153
Thursday, April 04, 2013
INTRODUCTION
Non-performing or 'infected loans’ have reached a staggering Rs.653 billion in Pakistan(Sabir, 2012)
Important to screen loan applicants to determine the creditworthiness of borrowers
Sample size:100 respondents Analysis of socio-demographic and
financial variables in Stata 11 software
HYPOTHESIS 1: DEBT BURDEN Ho: There is no significant relationship between the debt
burden of the prospective borrower and the subsequent approval of loan request.
H1: There is an inverse relationship between the debt burden of the prospective borrower and the subsequent approval of loan request.
Has the bank approved or disapproved the loan request?
Debt burden Disapproval Approval Total
No debt burden 0 12 12
Less than 40% 11 37 48
More than 40% 34 6 40
Total 45 55 100
DEBT BURDEN
No debt burden
Less than 40% More than 40%0
10
20
30
40
0
11
34
12
37
6
Dis-ap-provalApproval
12; 100%
No debt burden vs. Have you taken loans
from other banks?
YesNo
4; 33%
1; 8%2; 17%
5; 42%
No debt burden vs. Monthly income Less than
Rs.30,000Rs.31,000- Rs.60,0000Rs.61,000-Rs.90,000Rs.91,000-Rs.120,000Rs.121,000-Rs.150,000Rs. 150,000+
DEBT BURDEN
9; 75%
3; 25%
No debt burden vs. Are you self em-
ployed?
Yes
No
3; 25%
6; 50%
3; 25%
No debt burden vs. Years of running business 1-3 years
4-6 years
7-9 years
10-12 years
13-15 years
16+ years
I don’t run my own business
No debt burden
Less than 40% More than 40%0
10
20
30
40
0
11
34
12
37
6
Dis-ap-provalApproval
DEBT BURDEN
2; 17%
6; 50%
1; 8%
3; 25%
No debt burden vs. Number of dependents
None
1 to 3
4 to 6
7 to 9
No debt burden
Less than 40% More than 40%0
10
20
30
40
0
11
34
12
37
6
Dis-ap-provalApproval
DEBT BURDEN
12; 25%
36; 75%
Less than 40% vs. Marital status
Single
Married
Widowed
15; 31%
29; 60%
4; 8%
Less than 40% vs. Number of dependents
None
1 to 3
4 to 6
7 to 9
No debt burden
Less than 40% More than 40%0
10
20
30
40
0
11
34
12
37
6
Dis-ap-provalApproval
DEBT BURDEN
7; 15%
6; 13%
17; 35%7; 15%
7; 15%
4; 8%
Less than 40% vs. Current employer
Less than 1 year
2-4 years
5-7 years
8-10 years
11+ years
I run my own business
29; 60%7; 15%
2; 4%4; 8%
6; 13%
Less than 40% vs. Monthly income
Less than Rs.30,000
Rs.31,000- Rs.60,0000
Rs.61,000-Rs.90,000
Rs.91,000-Rs.120,000
Rs.121,000-Rs.150,000
Rs. 150,000+
No debt burden
Less than 40% More than 40%0
10
20
30
40
0
11
34
12
37
6
Dis-ap-provalApproval
DEBT BURDEN
14; 35%
9; 23%
10; 25%
4; 10%1; 3%2; 5%
More than 40% vs. Monthly income
Less than Rs.30,000Rs.31,000- Rs.60,0000Rs.61,000-Rs.90,000Rs.91,000-Rs.120,000Rs.121,000-Rs.150,000Rs. 150,000+
No debt burden
Less than 40% More than 40%0
10
20
30
40
0
11
34
12
37
6
Dis-ap-provalApproval
DEBT BURDEN
10; 25%
13; 33%
11; 28%
3; 8%3; 8%
More than 40% vs. Monthly installment
Less than Rs.20, 000
Rs.21, 000- Rs.40, 000
Rs.41, 000- Rs.60, 000
Rs.61, 000- Rs.80, 000
Rs.81, 000+
No monthly in-stallment
No debt burden
Less than 40% More than 40%0
10
20
30
40
0
11
34
12
37
6Dis-ap-provalApproval
DEBT BURDEN
Both Sullivan and Fisher (1988) and Canner and Luckett (1991) found that the likelihood of late or missed payments on the borrowers’ auto loans and credit cards tend to arise in households that have a high ratio of monthly consumer debt payment to the monthly disposable income (Sullivan, 1988).
HYPOTHESIS 2: AGE Ho: There is no significant relationship between the age of
the potential borrowers and the subsequent approval of loan request.
H1:There is a significant relationship between the age of the potential borrowers and the subsequent approval of loan request.
Has the bank approved or disapproved the loan
request?
Age Disapproval Approval Total
21-25 5 4 9
26-30 6 20 26
31-35 16 10 26
36-40 2 4 6
41-45 4 10 14
46+ 12 7 19
Total 45 55 100
AGE
21-25 26-30 31-35 36-40 41-45 46+0
5
10
15
20
5 6
16
24
12
4
20
10
4
107
DisapprovalApproval
2; 22%
6; 67%
1; 11%
Age:21-25 vs. Current employer
Less than 1 year
2-4 years
5-7 years
8-10 years
11+ years
I run my own business
4; 15%
19; 73%
3; 12%
Age: 26-30 vs. Debt burden
No debt burden
Less than 40%
More than 40%
AGE
7; 27%
12; 46%
6; 23%
1; 4%
Age: 31-35 vs. Monthly income
Less than Rs.30,000
Rs.31,000- Rs.60,0000
Rs.61,000-Rs.90,000
Rs.91,000-Rs.120,000
Rs.121,000-Rs.150,000
Rs. 150,000+
21-25 26-30 31-35 36-40 41-45 46+05
101520
5 6
16
2 4
12
4
20
10
4
107
DisapprovalApproval
20; 77%
6; 23%
Age:31-35 vs. Have you ever taken loans from
other banks?
Yes
No
AGE
17; 65%
6; 23%
2; 8%
1; 4%
Age: 31-35 vs. Monthly installment
Less than Rs.20, 000Rs.21, 000- Rs.40, 000Rs.41, 000- Rs.60, 000Rs.61, 000- Rs.80, 000Rs.81, 000+No monthly installment
21-25 26-30 31-35 36-40 41-45 46+05
101520
5 6
16
2 4
12
4
20
10
4
107
DisapprovalApproval
11; 42%
15; 58%
Age: 31-35 vs. Debt burden
No debt burden
Less than 40%
More than 40%
AGE
21-25 26-30 31-35 36-40 41-45 46+05
101520
5 6
16
2 4
12
4
20
10
4
107
DisapprovalApproval
15; 79%
4; 21%
Age: 46+ vs. Have you taken loans from other banks?
Yes
No
HYPOTHESIS 3: NUMBER OF DEPENDENTS
Ho: There is no significant relationship between the number of dependents and the subsequent approval of loan request.
H1:There is a significant relationship between the number of dependents and the subsequent approval of loan request.
Has the bank approved or disapproved the loan request?
Number of
dependants
Disapproval Approval Total
None 11 14 25
1-3 21 32 53
4-6 13 6 19
7-9 0 3 3
Total 45 55 100
NUMBER OF DEPENDENTS
none 1 to 3 4 to 6 7 to 90
10
20
30
40
11
2113
0
14
32
6 3
Dis-ap-proval
20; 80%
5; 20%
No dependents vs. Mar-ital status
Single
Married
Wid-owed 22; 88%
3; 12%
No dependents vs. Are you a salaried person?
Yes
No
NUMBER OF DEPENDENTS
7; 28%
16; 64%
2; 8%
No dependents vs. Monthly income
Less than Rs.30,000Rs.31,000- Rs.60,0000Rs.61,000-Rs.90,000Rs.91,000-Rs.120,000Rs.121,000-Rs.150,000Rs. 150,000+
none 1 to 3 4 to 6 7 to 90
10
20
30
40
11
2113
0
14
32
6 3
Dis-ap-proval
20; 80%
2; 8%3; 12%
No dependents vs. Employment status
Per-ma-nentContract
I run my own business
NUMBER OF DEPENDENTS
2; 4%
10; 19%
12; 23%
8; 15%
11; 21%
10; 19%
1 to 3 dependents vs. Current employer Less than 1
year
2-4 years
5-7 years
8-10 years
11+ years
I run my own business
43; 81%
10; 19%
1 to 3 dependents vs. Are you a salaried
person?
YesNo
none 1 to 3 4 to 6 7 to 90
10
20
30
40
11
2113
0
14
32
6 3
Dis-ap-proval
NUMBER OF DEPENDENTS
18; 95%
1; 5%
4 to 6 dependents vs. Have you taken loans
from other banks?
YesNo
2; 11%
5; 26%
4; 21%
1; 5%1; 5%
6; 32%
4-6 dependents vs. Monthly income
Less than Rs.30,000
Rs.31,000- Rs.60,0000
Rs.61,000-Rs.90,000
Rs.91,000-Rs.120,000
Rs.121,000-Rs.150,000
none 1 to 3 4 to 6 7 to 90
10203040
1121
13
0
14
32
6 3
Dis-ap-proval
NUMBER OF DEPENDENTS
5; 26%
6; 32%2; 11%
2; 11%
3; 16%
1; 5%
4 to 6 dependents vs. Monthly installment
Less than Rs.20, 000
Rs.21, 000- Rs.40, 000
Rs.41, 000- Rs.60, 000
Rs.61, 000- Rs.80, 000
Rs.81, 000+
No monthly installment
none 1 to 3 4 to 6 7 to 90
10
20
30
40
11
2113
0
14
32
6 3
Dis-ap-proval
3; 100%
7-9 dependents vs. Are you self employed?
Yes
No
3; 100%
7-9 dependents vs. Years of running business
1-3 years
4-6 years
7-9 years
10-12 years
13-15 years
16+ years
I don’t run my own business
NUMBER OF DEPENDENTS
none 1 to 3 4 to 6 7 to 90
10203040
1121
13
0
14
32
6 3
Dis-ap-proval
3; 100%
7 to 9 dependents vs. Have you taken loans
from other banks?
Yes
No
NUMBER OF DEPENDENTS
none 1 to 3 4 to 6 7 to 90
10
20
30
40
11
2113
0
14
32
6 3
Dis-ap-proval
3; 100%
7-9 dependents vs. Monthly income Less than
Rs.30,000
Rs.31,000- Rs.60,0000
Rs.61,000-Rs.90,000
Rs.91,000-Rs.120,000
Rs.121,000-Rs.150,000
Rs. 150,000+
NUMBER OF DEPENDENTS
3; 100%
7 to 9 dependents vs. Monthly installment Less than
Rs.20, 000
Rs.21, 000- Rs.40, 000
Rs.41, 000- Rs.60, 000
Rs.61, 000- Rs.80, 000
Rs.81, 000+
No monthly installment
none 1 to 3 4 to 6 7 to 90
10
20
30
40
11
2113
0
14
32
6 3
Dis-ap-proval
HYPOTHESIS 4: EDUCATIONAL QUALIFICATION Ho: There is no significant relationship between the
educational qualification of the borrowers and the subsequent approval of loan request.
H1: There is a significant positive relationship between the educational qualification of the borrowers and the subsequent approval of loan request.
Has the bank approved or disapproved the loan request?
Educational
Qualification
Disapproval Approval Total
Matric/O Level 1 0 1
Intermediate/ A
Level
3 1 4
Undergraduate 3 2 5
Graduate 21 26 47
Postgraduate 17 26 43
Total 45 55 100
EDUCATIONAL QUALIFICATION
39; 91%
1; 2%
3; 7%
Postgraduate vs. Em-ployment status
PermanentContractI run my own business
0
10
20
30
1 3 3
2117
0 1 2
26 26
Disapproval
Approval
EDUCATIONAL QUALIFICATION
highly qualified individuals are normally considered to get highly paid jobs (I.L. Ali, personal communication, February 15, 2013). Ali (2013) claims that with a better qualification on hand, they are likely to get hired by cash rich multinational companies
EDUCATIONAL QUALIFICATION
1; 25%
3; 75%
Intermediate vs. Are you self employed?
Yes
No
1; 25%
3; 75%
Intermediate vs. Age
21-2526-3031-3536-40 41-4546+
0
10
20
30
1 3 3
2117
0 1 2
26 26
Disapproval
Approval
EDUCATIONAL QUALIFICATION
82; 82%
18; 18%Are you self employed? Vs. Are
you salaried
salaried
self em-ployed
0
10
20
30
1 3 3
2117
0 1 2
26 26
Disapproval
Approval
CONCLUSION The thesis intended to investigate the
characteristics that banks evaluate before giving out loans to borrowers
According to this research, all four variables have a significant relationship with obtaining the loan approval Higher the debt burden, lower the chances are of
obtaining approval. The likelihood of loan approval is less in the early
twenties and late forties Lesser the number of dependents, the higher the
chances are of obtaining approval. Higher the educational qualification, higher the
chances are of obtaining approval.
FUTURE
Impact of economic environment must also be studied
Need to investigate the credit history of borrowers
The study must be conducted on more banks
Lending policies must be tightened Aggressive promotion of credit cards
must be avoided
REFERENCES
Aazim, M. (2012, June 11). Imbalance in Bank Lending. Retrieved February 14, 2013, from The Dawn: http://dawn.com/2012/06/11/imbalance-in-bank-lending/
Ali, I. L. (2013, February 14). Credit Officer Soneri Bank. (S. Moazzam, Interviewer)
Canner, G.B., & Luckett, C.A. (1991). Payment of household debts. Federal Reserve Bulletin, 77(April), 218-229.
Meyer, M. B. (1993). The Political Economy of Rural Loan Recovery: Evidence From Bangladesh. Savings and Development , 17 (1), 23-38.
Peterson, CM., & Peterson, R.L. (1981). Down payments, borrower characteristics, and defaults. Journal of Retail Banking, 3( 1, March), 1-6.
Sabir, M. A. (2012, August 27). Banking Sector: Non-performing Loans on the Rise. Retrieved February 14, 2013, from Investor Guide: http://investorguide360.com/latest-economic-news/banking-sector-non-performing-loans-on-the-rise-investcap-research/
Sullivan, C., & Fisher, R.M. (1988). Consumer credit delinquency risk: Characteristics of consumers who fall behind. Journal of Retail Banking, 10(3, Fall), 53-64.