Corporate stress and bank nonperforming loans: Evidence from Pakistan

Using detailed administrative Pakistani credit registry data, we show that banks with low leverage ratios are both significantly slower and less likely to recognize a loan as nonperforming than other banks that lend to the same firm. Moreover, we find suggestive evidence that this lack of recognitio...

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Bibliographic Details
Published in:Journal of banking & finance 2021-12, Vol.133, p.106234, Article 106234
Main Authors: Choudhary, M. Ali, Jain, Anil K.
Format: Article
Language:English
Subjects:
Banks
Corporate debt
Credit markets
Evergreening
Nonperforming loans
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Summary:Using detailed administrative Pakistani credit registry data, we show that banks with low leverage ratios are both significantly slower and less likely to recognize a loan as nonperforming than other banks that lend to the same firm. Moreover, we find suggestive evidence that this lack of recognition impedes loan curing, with banks with low leverage ratios reporting significantly higher final default rates than other banks for the same borrower (even after controlling for differences in loan terms). Our empirical findings are consistent with the theoretical prediction that classifying a nonperforming loan is more expensive for banks with less capital.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2021.106234