August 2021

Corporate stress and bank nonperforming loans: Evidence from Pakistan

Ali M. Choudhary and Anil K. Jain

Abstract:

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.

Keywords: Credit markets, banks, corporate debt, evergreening, nonperforming loans.

DOI: https://doi.org/10.17016/IFDP.2021.1327

PDF: Full Paper

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Last Update: August 20, 2021