Credit Reporting, Relationship Banking, and Loan Repayment increases repayment rates, as borrowers anticipate that a good credit record. market performance as relationship banking enforces repayment even when experimental credit market in which loan repayment is not third-party enforceable . financial means to repay the loan, they decide wheth- er to repay or to . it does not perform better than relationship banking. tive bureaus and credit reporting.
However, you could get your loan faster and with fewer checks by the lender. For example, in many government banks, government and PSU employees are most preferred as they have a stable job. After government employees, banks prefer people working with blue-chip companies and doctors.
Further down the line come chartered accountants, engineers and lawyers.Commercial Banking Interview Questions
People working in private companies and self-employed get the lowest scores. It is important because repayment capacity depends on the income of the person," says an HDFC spokesperson. Similarly, a borrower switching jobs frequently gives a negative impression.
Also, every application is treated equally irrespective of whether it is of a government or a private sector employee because each one has its merits and demerits," he adds AGE Age is another criterion that banks look at before giving a loan.
To give you an idea, people in the age group of years are most preferred as they are considered more financially stable. They also have a decent number of working years left to repay their loans. On the other hand, people above 60 fare the worst in the internal scoring model of banks.
What Banks look at before approving a Home Loan- Business News
For example, according to one of the public sector banks, a property within city municipality limits or in the same city or town is the most preferred. If the property is very far, banks tend to hesitate in approving a loan. This is because the longer you serve the more points you earn with the bank.
For example, people working for more than 15 years are preferred over those with an experience of up to 10 years. Banks prefer people who have been serving in a company for at least three years.
Assume that you would like to buy a property worth Rs 1 crore. According to Mugerwa micro credit institutions always give funds to active people who clearly know why they want the funds. The marital status of the respondents as per the findings in table 4.
This profile is probably because it is the married that have a heavier financial burden since they have families to support and therefore in need to have credit to engage in economic activities from which they can earn a living. Married people also borrow in order to get startup capital.
This enables them to engage in businesses which will increase their productivity and eventually their household incomes. Credit institutions also find it easy to give credit to married person then single persons since most of the time they give security to one other Olijude, The time respondents had spent in business was such that majority Findings regarding the number of times the clients had borrowed revealed that most of the respondents This was frequent enough for the clients to have experienced circumstances that enable them to provide appropriate responses to the study variables.
Factor analysis was employed to identify structure of each of credit terms. Using principal components method specifically the varimax, only those factors with an Eigen value greater than one were retained according to Guttman-Kaiser rule.
Demographic characteristics was underscored by marital status of the borrowers. Ability to pay was best represented by Income levels of the borrower. Loan period Collateral Interest rate The waiting time until I receive the loan is.
The favorable interest rates enhance my. Varimax with Kaiser Normalization.
Rotation converged in 5 iterations. Factor structure of Credit terms Results in table 3 revealed the factor structure for credit terms to consist of three factors. Loan period was underscored by; the waiting time before a borrower receives the loan being short.
The pertinent issues with respect to the interest rate were; the frequent adjustment of the interest rate charged to the borrowers.
Factor structure of Loan repayment Willingness Ease of Timeliness to pay payment I willingly pay my loans without any. Rotation converged in 4 iterations. The factor analysis of loan repayment from table 4 showed that of the three factors; willingness to pay was the most significant, followed by timeliness and lastly ease of payment each explaining Timeliness of payment was underscored by; the ability to pay the loans on due dates and the reminders from SACCOs about paying back.
This Pearson product moment correlation method was used to generate the measure of the magnitude and direction of the relationship between the study variables. Correlation is significant at the 0. The relationship between Borrower's characteristics and Loan repayment Findings in table 4.
This is an indication that the Borrower's characteristics were not necessarily associated with Loan repayment. In other words ones marital status, age, income level, education level, work experience and occupation could not indicate the loan repayment performance of the clients of the MFIs. The relationship between Credit terms and Loan repayment Findings in table 4.
This implies that the level of flexibility of the credit terms was directly associated with the level of loan repayment. In other words, when the credit terms in terms of collateral requirement, loan period and interest rate are flexible and not too much straining, the clients also find it easy to repay their loans.
Regression model of Entrepreneurial intentions In order to establish the relationship between Borrower's characteristics, Credit terms and Loan repayment the regression of loan repayment was conducted. B Beta Error Constant 2. This implies that the more flexible the credit terms get, the more the easier it gets for clients of the MFIs to pay their loans.
For instance if clients are at liberty to negotiate the length of loan period or if collateral requirements are within the means of the clients then they would comfortably pay back the loans extended to them on time. Conclusion From the results of current study, it can be concluded that; given the importance of credit terms as determinants of loan repayment among clients of MFIs at Luwero district, it is imperative for all the policy makers of the MFIs in Luwero district to give it the weight it deserves.
The managers and policy makers need to pay particular attention to the collateral required of the borrowers before extending loans to them, which should be valuable enough to motivate borrowers to make good their loan obligations. The length of the loan period should be set as to encourage loan repayment by striking a good middle ground between lenience and stringency since both extremes would not yield successful results.
Lastly the interest rate should be set in such a way that the average interest paid on a loan of average size does not constitute a very big part of the cost of production. Recommendations Micro finance is an important part of the growth strategy in Uganda and has in the recent years gained increasing recognition. This is evidenced by initiatives and strong commitment by government, donors and practitioners towards supporting microfinance activities in Uganda. Given the objectives of the research study, the findings, discussion and conclusions, the following recommendations have been made by the researcher: The MFIs in Luwero should conduct sensitization workshops for their clients so to increase their financial literacy which would enable them to take sound financial decisions such as proportionate loan sizes they can comfortably pay back.
Group screening, mentoring and routine monitoring should be undertaken by lenders to induce desired financial behavior of customers before, during and after extending loans to groups. Limitations and suggestions for future research The data was collected by self-administering the questionnaires with close ended questions and this is likely to have limited the amount of data collected. Some respondents developed fear and became unwilling to answer the different questions thinking that the information would be used to disclose what actually is happening in different SACCOS.
Following the findings from this research study, the following area are suggested for further research: Perform a qualitative analysis of the factors that affect loan repayment in Luwero district. Investigate the relationship between the level of supervision and Loan repayment among clients of MFIs in Luwero district.
The current study accounts for Determinants of repayment in microcredit: Evidence from programs in the United States. International Journal of Urban and Regional Research, 26 2 Repayment rate of loans from semi-formal financial institutions among small-scale farmers in Ethiopia: The Journal of Socio-Economics, 37, In addition, the borrower must have the capacity to ingest a large sum of money. Customers who are frequent borrowers establish a reputation which directly impacts on their ability to secure debt at advantageous terms.
Lenders accept additional risk as the time horizon increases. To cover some of the risk, lenders charge higher interest rates for longer term loans. Social and community considerations. Lenders may accept an unusual level of risk because of the social good resulting from the use of the loan. Examples might include banks participating in low-income housing projects or business incubator programs.
Credit is one of the foundations of the American economy, and small businesses often must obtain credit in order to compete. To establish credentials for any credit approval process, from short-term loans to equity funding, a small business needs to have a business plan and a good credit history.
The company must be able to show that it can repay the loan at the established interest rate. It must also demonstrate that the outlook for its type of business supports planned future projects and the reasons for borrowing. In applying for credit, small business owners should realize that potential creditors-;whether banks, vendors, or investors-;will seek to evaluate both their ability and willingness to pay the amount owed. This means that the creditor will examine the character of the borrower as well as his or her ability to run a successful business.
Creditors will also look at the size of the loan needed, the company's purpose in obtaining funds, and the means of repayment.
Ideally, lenders evaluating a small business for credit approval like to see up-to-date books and business records, a large customer base, a history of prompt payment of obligations, and adequate insurance coverage.
The process of granting loans to businesses is regulated by the Federal Trade Commission FTC to ensure fairness and guarantee nondiscrimination and disclosure of all aspects of the process.
The Small Business Administration SBA publishes a series of pamphlets and other information designed to assist businesses in obtaining loans. These publications advise businesses on a range of credit approval topics, including describing assets, preparing a business plan, and determining what questions to expect and how to prepare responses to those questions.
The process by which a small business grants credit to individuals is governed by a series of laws administered by the Federal Trade Commission that guarantee nondiscrimination and other benefits. Experts recommend that small businesses develop credit policies that are consistent with overall company goals.
In other words, a company's approach toward extending credit should be as conservative as its approach toward other business activities. While granting credit to customers can offer a small business a number of advantages, and in fact is a necessary arrangement for many types of business enterprises, it also involves risks.
Some of the disadvantages of providing customers with credit include increasing the cost of operations and tying up capital that could be used elsewhere.
There is also the risk of incurring losses due to nonpayment, and of eroding cash flow to an extent that requires borrowing. But granting credit does offer the advantage of creating a strong base of regular customers.