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The purpose of this paper is to investigate whether the quality of the credit process is sensitive to reaching a particular threshold level of non-performing loans (NPLs) and, more importantly, whether higher NPLs ratios could make the monitoring activity ineffective.

The empirical design is composed of two steps: in the first step, the authors introduce a monitoring performance indicator (MPI) of the credit process by combining the non-parametric technique Data Envelopment Analysis with some financial ratios adopted as input and output variables. As second step, the authors apply a threshold panel regression model to a sample of 298 Italian banks, over the time period 2006–2014, and the authors investigate whether the quality of the credit process is sensitive to reaching a particular threshold level of NPLs.

This paper finds that, first, when the NPLs ratio remains below the threshold value estimated endogenously, an increase in the quality of monitoring has a positive impact on the NPLs ratio. Second, if the NPLs ratio exceeds the estimated threshold, the relationship between the NPLs ratio and quality of monitoring assumes a positive value and is statistically significant.

Due to the lack of data, the investigation of NPLs in the Italian industry across loan types combined with the monitoring effort by banks management was not possible. The authors plan to investigate this topic in future studies.

The identification of the threshold has a double operational valence. The first regards the Supervisory Authority, the threshold approach could be used as an early warning in order to introduce active control strategies based on the additional information requested or by on-site inspections. The second implication is highlighted in relation to the individual banks, the monitoring of credit control quality, if objective and comparable, could facilitate the emergence of best practices among banks.

A high NPLs ratio requires greater loan provisions, which reduces capital resources available for lending, and dents bank profitability. Moreover, structural weaknesses on banks’ balance sheets still persist particularly in relation to the inadequate internal governance structures. This means that bank management must able to recognise in advance early warning signals by providing prudent measurement together with an in-depth valuation of loans portfolio.

The originality of the paper is twofold: the authors introduce a new proxy of credit monitoring, called MPI; the authors provide an empirical proof of the Diamond’s (1991) economic intuition: for riskier borrowers, the monitoring activity is an inappropriate instrument depending on the bad reputational quality of borrowers.

The paper aims to disentangle the physiological credit risk from the credit risk coming from the inefficient screening and monitoring management process. The analysis is conducted on a sample of 338 Italian banks–56 joint-stock banks (SpA), 23 cooperative banks (Popolari) and 259 mutual banks (BCCs)–over the time period 2006–2017.

The authors use the maximum likelihood method to estimate the efficient frontier, as a set of best management credit practices, which minimises the credit risk defined on the basis of the level of loans granted, the technical structure of the loan portfolio (such as credit lines, mortgages, consumer loans and other technical loan categories) and the interest rate charges.

The empirical results show that the increase in non-performing loans (NPLs) is related both to the severe and protracted recession in Italy, which significantly reduced borrowers' capacity to service their debt, and to other factors, such as banks' lending monitoring policies with limited capacity to work-out defaulted loans.

The authors propose a new approach to the study of the performance of the credit process. With the stochastic frontier, the physiological credit risk, assumed by the bank according to its lending activity and management choices, is separated from the credit risk resulting from an inefficient management of the screening and monitoring process. In addition, the authors analyse the determinants of the excess of NPLs. This aspect is considered particularly original because the scientific contributions which consider the causes of NPLs have largely focused on the level of NPLs not considering the physiological part, linked to the structure of the bank's loan portfolio and its operational strategy and therefore not compressible and in any case not attributable to mismanagement or moral hazard.

The purpose of this paper is to investigate the role of joint liability in improving the repayment performance of a microfinance program.

This is a systematic review of the theoretical and empirical literature.

The theoretical literature has shown, using models of peer selection, peer monitoring and peer pressure, that joint liability overcomes both the informational and enforcement failures present in credit markets for the poor. However, the empirical literature does not yield a clear answer on how much of the success of microfinance programs can be attributed to the effect of joint liability alone without considering the effect of other instruments used by microfinance programs. Further, it is seen that joint liability does not work in isolation, but its effect is dependent on social, cultural and economic environment.

An important future research agenda could be to study the roles of different overlapping mechanisms in group lending and to look at their interactions.

The concept of joint liability works well both in the rural and urban areas, but different social, cultural and economic factors should be analyzed before initiating a microfinance program. In developed regions, focus should be on strengthening peer selection and peer monitoring, as information problems are prevalent. In underdeveloped regions, the major problem is of strategic default, so the focus should be on strengthening social sanctions.

Findings can be used for optimal design of credit contracts for the poor.

The paper reviews the existing literature on – “whether and how” – joint liability lending works in inefficient credit markets and comes up with practical implications for the microfinance sector.

Faced with the financing problem of small-medium enterprises (SMEs), China has attempted to establish as many as third party's collateral institutions. The paper aims to study the design of collateral arrangements including collateral fee rates, risk sharing, collateral capital requirements, types of collateral institutions and recollateral institution, etc.

The paper extends the model of Holmstrom and Tirole to develop the analytic framework of the theory of financing collateral. From the perspective of contract design, the paper establishes a moral hazard model focusing on the minimum capital requirement of the borrower under the condition of risk neutral and limited liability, while considering the structure of lender-collateral institution-borrower.

According to the research, only under certain conditions can third party's collateral arrangements tackle the financing problems of SMEs. Diversification, anti-collateral and linked-transactions are three means to improve financing conditions, but the most important way is efficient monitoring by collateral institutions, especially when it has relative advantage over the lender. In order to improve financing conditions of SMEs, China should rely more on efficient monitoring by banks not on excess development of collateral institutions, meanwhile relax rigid collateral supervision policies. Collateral institutions should be industry-specific, association or transaction-related type.

First, from the perspective of contract design, the paper analyzes the comprehensive institutional arrangements of third party's collateral considering mutual relationships of component elements and develops the analytic framework of the theory of third party's collateral, especially points out necessary conditions of its efficient arrangements. Second, the paper studies various efficient financing mechanisms under the institutional arrangements of third party's collateral and focusing on the role of monitoring and monitors, and the paper also has important policy implications, i.e. the paper should develop specific collateral institutions and promote monitoring role of credit institutions.

This paper aims to explore the interplay between risk management and control systems in banks, specifically investigating the managerial intentions underlying the design of management control systems.

This study is based on 31 interviews with personnel of two banks in a European country.

The main finding is that belief systems drive the interplay between risk management and control systems in the studied banks. In several instances, belief systems and boundary systems were operating complementarily. Cross-case analyses of the two banks demonstrate that risk management (i.e. the Basel II Accord) replaced established operating procedures for loan origination and portfolio monitoring at the first bank, whereas senior managers suppressed Basel II to maintain established loan origination and portfolio monitoring procedures at the second one.

This is one of very few studies investigating the interplay between risk management and control systems in banks.

Over the last ten years (2010–2019), the amount of nonperforming loans (NPLs) has been more than tripled in the banking industry of Bangladesh. Thus, this paper explores the behavioral dimensions, which contribute to the NPLs.

By analyzing social, cultural, psychological, political, economic, internal control mechanism and law enforcement contexts of Bangladesh, this study identifies nepotism (NE), moral hazard (MH ), inadequate collateral (IC), poor credit assessment (CA), lack of proper monitoring (LPM), repayment flexibility (RF), business risk (BR) and lending interest rate (LIR) as the catalysts of raising NPLs. Next, a structured questionnaire survey has been performed in Bangladesh among bank officials who closely work in credit risk management, credit supervision, corporate finance and loan recovery department. Finally, partial least squares (PLS) path modeling, a variance-based technique of structural equation modeling, is used in this study as a statistical tool to analyze the data.

This study finds that moral hazard problem, lack of proper monitoring, inadequate collateral and nepotism have significant positive impact on the raising of NPLs. Unfortunately, this study does not find any statistical significance of poor credit assessment, business risk and repayment flexibility on the NPLs in Bangladesh. Finally, this study reveals that lending interest rate has significant positive impact on the NPLs. Hence, this study concludes that domestic lending interest rate is not lower enough, and so this double-digit interest rate affects negatively to loan repayment.

This study concludes that moral hazard problem of borrower, lack of board independence, lack of proper monitoring, form and extent of collateral, management lobbying, indecorous personal guarantee by management, dependent-independent directors and nepotism are extensively contributing for occurring NPLs in Bangladesh. These noninstitutionalized stimulators should adequately be scrutinized by regulatory bodies, policy makers and banks. Besides, LIR needs to be decreased in a convenient level for mitigating NPLs.

This study is the empirical evidence of behavioral dimensions related with the growth of NPLs in Bangladesh by taking direct response from knowledgeable bankers.

The purpose of this paper is to investigate the balanced role of internal and external compliance in risk evaluation process of specialized agriculture financing. The authors examine the adaptive behavior of risk managers to determine the role of proposed transformation for risk monitoring (RM) and control process in risk mitigation and avoidance of agriculture credit failure.

A self-administered survey was conducted to collect data from 353 risk-related officers and managers in Zarai Taraqiati Bank Limited (ZTBL) Pakistan. The authors used a previously tested scale for the main constructs. The descriptive analyses were used to gauge the model capacity for determining the strength of proposed risk patterns in agriculture risk management.

The results reveal that risk evaluation process in ZTBL is reasonably efficient in mitigating risks. Given the sensitive nature of farm credit, there is a need of fundamental reforms in risk policy manuals in line with central bank’s agriculture prudential regulations and Basel-III standards. The results fully support H1 and H2, while H3 is partially validated. The result patterns indicate serious issues in risk evaluation process in agriculture finance that is causing higher delinquency in farm credit.

Based on highlighted issues, the authors recommend valuable guidelines in the RM review system for agriculture financing products at ZTBL.

The authors propose remodeling of agriculture risk management and offer valuable insights to the agriculture financial regulators and government in taking policy initiatives in the pre-and-post agriculture risk evaluation process. The proposed model enables RM process to improve farm credit delinquency, particularly in ZTBL and other agriculture banking networks in commercial banks.

This is the first study to empirically investigate RM evaluation process in agriculture risk management of ZTBL in Pakistan, thus, offers new horizon of farm credit regulatory compliance in agricultural sector of Pakistan.

Sound lending procedures in retail financial institutions involve identifying high‐risk applicants, modifying loan conditions such as security requirements, and monitoring repayments post‐loan approval. For managers of credit unions, this procedure is complicated by the need to achieve balance between the institution’s social objective of improving loan accessibility so members can attain lifestyle goals and the possibility of reducing the institution’s viability through loan default. The results of our survey of Australian credit unions, in which 70 per cent of respondents reported experiencing some bankruptcy‐related default on personal loans, indicate managers do not impose more stringent lending conditions on high‐risk borrowers. However, social and viability objectives could be better balanced through careful loan monitoring and timely arrears practices.

This paper aims to study a strategic decision of banks in Thailand to signal their types to the market and derive the optimal credit derivatives contract to guarantee their loans and credibly signal their quality under different economic determinants, namely, the maximum credit risk investment constraint, opportunity cost and opaqueness of the credit derivative market.

Contract theory is deployed to derive the expected payoff of different bank types under different economic and financial constraints. Hence, different bank types offer derivatives contracts to signal their loan quality and resell their loans in the secondary loan markets of Thailand.

The optimal derivatives contract is constructed on a basis of asymmetric information when banks have more private information concerning quality of their loans. A digital credit default swap is an optimal derivatives contract to send credible signal when banks are restricted to the maximum investment constraint. Moreover, profit of banks is reduced, as the optimal derivatives contract is more costly when banks are subjected to positive opportunity cost and opacity of the credit derivatives market. These results depict impact of changes of the maximum credit risk investment constraint on Thai credit derivatives market.

The optimal credit derivatives design that signifies bank types and facilitates loan purchase agreement has not been studied in Thai secondary loan markets before. In addition, this study provides insights of banks' strategic decisions to signal their types and transfer risk to risk buyers in Thai markets.

The purpose of this paper is to investigate how the design of loan officer reward systems affects bank credit losses caused by commercial clients.

This paper uses an agent-based model to investigate how the design of reward systems affects bank credit losses. Two different systems are compared: competitive and a cooperative. The model is designed according to the theoretically derived assumption that a cooperative reward system will make agents more likely to share knowledge with each other in the processes of granting and monitoring credit.

The results show that a cooperative reward system have potential to reduce bank credit losses. The reduction of errors in evaluating company’s probability of default thus mitigates variations induced by variations in industry, region, and firm-specific returns.

The findings imply that reward system design should be considered in credit risk management. Further, managerial issues (e.g. reward systems) should be considered in risk modeling.

The results presented in this paper provide evidence to the value of considering the downside (e.g. loss) when designing reward systems in banks.