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Abstract The concept of the ‘discouraged’ borrower is well documented. In this paper, we consider whether smaller firms in the UK who have been previously rejected for bank loans have been scarred by the experience so badly that even in the presence of two exceptionally generous Covid-19 loan guarantee schemes, they still refuse to make an application. Furthermore, we also consider what happens when they do. As banks have either zero or minimal loss exposure, do they still maintain their normal strict lending protocols or do they relax their standards to fulfil the governments’ objective of supporting struggling businesses through the crisis? Our findings show that 72% of previously rejected borrowers are reluctant to request loans. We find some evidence that previously scarred firms faced such severe liquidity problems that they relaxed their distrust of banks during the Covid-19 crisis. However, their share of the government-guaranteed loan portfolio was slightly lower suggesting that banks were treating each new loan application on its merits.Plain English SummaryThe Covid-19 crisis hit smaller businesses so hard that even previously rejected borrowers were forced to apply for loans to keep them afloat. Previous loan rejections have not discouraged small businesses in the UK in applying for Covid-19 government-guaranteed loans. Banks have used the loan guarantee schemes to continue to supply loans to small business during the pandemic. Our paper analyses the important phenomenon of borrower scarring and discouragement, when potential debtors are self-excluded from the lending market because they have previous rejections or expect a negative bank response. We consider around 45,000 UK small businesses from 2018 to 2020. On the demand side, we find that the economic shock for small businesses during the pandemic dissipates the scarring effect. Specifically, we find that micro and small businesses had the highest loan demand in the first two quarters of the pandemic (from March 2020). On the supply side, we show that scarred borrowers were not routed onto Covid-19 government-guaranteed loan schemes. These findings show the importance of government-backed lending schemes for small businesses during crisis period.

This study empirically investigates the determinants of non-performing loans (NPLs) within the Cypriot banking sector by employing Pearson’s correlation analysis and Generalized Method of Moments (GMM) estimations. Utilizing a sample of 200 NPLs granted to individuals by a Cypriot banking institution from 2013 to 2019, the study examines both macroeconomic and borrower-specific factors influencing NPLs. The findings reveal significant associations between borrower profile characteristics - such as gender, age, education level, professional and financial standing, and place of residence - and loan-specific details, including loan purpose, type of collateral, and NPL status and rescheduling. The study also identifies that lower economic growth, higher inflation, and higher interest rates correlate with an increase in NPLs. Moreover, borrower-specific variables like return on assets and loan growth significantly affect NPL levels. These results offer valuable insights into management in taking corrective actions and have important policy implications for regulatory authorities in formulating effective economic policies. Additionally, the study guides potential investors by highlighting key risk factors associated with NPLs in Cyprus.

This paper determined the predefining factors of loan repayment behavior based on psychological and behavioral economics theories. The purpose of this research is to identify whether an individual’s credit risk can be predicted based on psychometric tests measuring areas of psychological factors such as effective economic decision-making, self-control, conscientiousness, selflessness and a giving attitude, neuroticism, and attitude toward money. In addition, we compared the psychological indicators to the financial indicators, and different age and gender groups, to assess whether the former can predict loan default prospects. This research covered the psychometric test results, financial information, and loan default information of 1118 borrowers from loan-issuing applications on mobile phones. We validated the questionnaire using confirmatory factor analysis (CFA) and achieved an overall Cronbach’s alpha reliability coefficient greater than 0.90 (α = 0.937). We applied the empirical data to construct prediction models using logistic regression. Logistic regression was employed to estimate the parameters of a logistic model. The outcome indicates that positive results from the psychometric testing of effective financial decision-making, self-control, conscientiousness, selflessness and a giving attitude, and attitude toward money enable individuals’ debt access possibilities. On the other hand, one of the variables—neuroticism—was determined to be insignificant. Finally, the model only used psychological variables proven to have significant default predictability, and psychological variables and psychometric credit scoring offer the best prediction capacities.

The main objective of this paper is to present an integrated approach to evaluate the level of satisfaction of borrowers with the products and services of microfinance institutions (MFI) at different criterion levels. For this, the study adopts the concept of FCEM (Fuzzy Comprehensive Evaluation Method) in concurrence with the AHP (Analytical Hierarchy Process). In our day-to-day situation, the researchers have made many efforts to assess the impact of Microfinance on poverty reduction, but borrowers’ satisfaction is always overlooked. Since the multiple factors impact the borrower’s satisfaction, each factor is made of different items. Thus, as the factors items increase, many uncertainties are created, and hence this will make the decision making unsmooth or imprecise. To describe this, the FCEM method deals with the vagueness in the collection information phase. However, the AHP has been utilized to determine the objective weights of each factor. The presented integrated framework has been illustrated with a case study and presented their results. The study’s managerial benefit is also reported to address the situation.

Why do middle-income country governments use costlier sovereign debt markets when cheaper finance is available from official creditors? This research note argues that left-leaning governments with labor and the poor as core constituencies are likely to prioritize markets in their annual foreign borrowings. This is because markets provide an exit option from official creditor conditions that have disproportionately negative effects on working classes. This finding puts limits on disciplinary assumptions that left-leaning governments should have relatively less access to sovereign debt markets and thus use them less. Instead, left-leaning middle-income countries are likely to use proportionally more market finance as they fulfill annual foreign borrowing needs. This, in turn, shapes which middle-income countries are likely to become relatively more exposed to global debt market costs and pressures as they accumulate external debt over time.

This paper analyzes the effect of bank market power on the financial constraints of small and mediumsized enterprises (SMEs) through the study of borrower discouragement. We use a cross-country sample of 2582 firms in 25 developed and developing European countries. Our results show that the intensity of borrower discouragement decreases with the level of bank market power, and this result is robust to the use of concentration and industrial organization measures of competition. When our model allows for non-monotonic effects, we show that more bank market power might increase borrower discouragement for firms operating in less developed economies and in countries with a high degree of bank market power. These results explain the conflicting evidence provided in previous literature concerning countries with different levels of economic development and bank market power. Our paper sets limits to the continuous concentration process in the European banking market, which may result in more discouraged and financially restricted SMEs.

In this paper, we investigate whether innovative small- and medium-sized enterprises (SMEs) are more likely to be discouraged from applying for external finance than non-innovators. These so-called discouraged borrowers are credit worthy SMEs who choose not to apply for external finance despite the fact that this is needed. We find that SMEs undertaking pure product and joint product and process innovation have a significantly higher incidence of borrower discouragement than non-innovative counterparts. Moreover, radical and incremental product innovators are more likely to be discouraged relative to non-innovative counterparts. Innovative activity can increase borrower discouragement for a myriad of reasons including fear of rejection, reluctance to take on additional risk, negative perceptions of the funding application process and perceived negative economic conditions. Overall, our results suggest a need for targeted policy interventions in order to alleviate borrower discouragement within innovative SMEs, as well as a closer alignment between innovation and SME finance policy.Plain English SummaryInnovative SMEs play a crucial role in driving technological change and productivity growth. Therefore, understanding the factors shaping access to finance for innovative SMEs is of crucial importance to the economy. We investigate the potential impact of innovation activity on the incidence of borrower discouragement, credit worthy firms who choose not to apply for external finance despite the fact that it is required. The results of our empirical investigation suggest that SMEs undertaking pure product and joint product and process innovation have a significantly higher incidence of borrower discouragement than non-innovative counterparts. The principal implication of this study is that innovation is a factor, which self-limits access to finance for innovative SMEs. We offer recommendations to mitigate borrower discouragement in this context.

This paper analyzes the importance of credit self-rationing for borrowers with lower levels of education using a survey of Vietnamese SMEs from 2004 to 2014. We show that entrepreneurs not only refrain from using formal credit because of burdensome application procedures but also because they are inherently debtaverse. Both factors are more prevalent in entrepreneurs with lower educational levels. Consistently, borrowers with lower education have a lower propensity of using formal credit, are more likely to perceive financial constraints, and are more likely to report difficulties during the loan application process. However, we find no evidence of higher supply-side rationing by banks for entrepreneurs with lower educational levels. Our results imply that efforts targeted at alleviating actual financial constraints will have limited results if debt aversion and apprehension towards formal finance are not properly addressed. The best way to do this is to favor better education.

The present article studies borrowing behaviour between credit surplus and credit constrained environments in the context of microfinance, with respect to rural borrowing. Surplus and constrained environments get defined based on the number of the state-promoted self help groups (SHGs) in the district, and the volume of credit disbursed through these SHGs. Four hundred nineteen respondents comprising of farmers, off-farm workers, farm labourers, small businesspersons, SHG members and chit-fund or cooperative members were interviewed in the surplus district of Chittoor and the constrained district of Nalgonda in the erstwhile state of Andhra Pradesh. Statistical analyses comprising of OLS, binary logistic regression, ANOVA, t-test and chi-square tests show that surplus environments offer more adverse credit terms, especially for farmers and farm labourers. Further, surplus causes over-borrowing and defaults. Constraint propels planned repayments. Both the environments offer varying credit terms across trades. We also observe better lending terms when farmers and traders are among lenders in a constraint environment. Interlinking factor markets like land, labour and capital in a constrained environment leads to efficient outcomes, reinforcing the theory of New Institutional Economics.

PurposeThe purpose of this study is to determine the nature of financial inclusion for individuals with various types of disabilities.Design/methodology/approachData from 2015, 2017 and 2019 FDIC Survey of Household Use of Banking and Financial Services was pooled, and binary logistic regressions were used to investigate differences in barriers to financial inclusion (e.g. unbanked) between people with different types of disabilities (e.g. cognitive) and those without such disabilities.FindingsUsing five separate barrier measures, the authors found specific disability types face different barriers to financial inclusion. For example, respondents with cognitive, ambulatory or two or more disabilities were more likely to use nonbank transaction products and alternative financial services. And, those with vision or cognitive disabilities were more likely to be denied or receive reduced credit. When examining aggregate barriers to financial inclusion (total number of barriers faced) respondents with cognitive, ambulatory, hearing or two or more disabilities experienced the lowest degree of financial inclusion in the authors’ dataset.Research limitations/implicationsCausal inference cannot be made due to the cross-sectional nature of the data. The data only covers the US population, and the measurement of disability type could include those with short-term impairments. Further, there may be an omitted variable bias.Practical implicationsBest practices to maximize financial inclusion for those with different disability types should address accessibility issues, bank staff education, financial literacy education and poverty issues. Additional government policies and oversight are also needed to protect and enhance the overall financial inclusion of people with disabilities.Originality/valueTo the best of the authors’ knowledge, this paper is the first to examine the relationship between various barriers to financial inclusion and aggregate barriers to financial inclusion by disability type. Specific disability types are found to face different barriers to financial inclusion.