International J ournal of Economy, Management and Social Sciences, 3(1) J anuary 2014, Pages: 82-87

TI J ournals
International Journal of Economy, Management and Social Sciences
www.tijournals.com
ISSN
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* Corresponding author.
Email address:hoda.majbouri@yahoo.com


Identification of the Factors Impacting the Increase in
Outstanding Claims at Melli and Mellat Banks
in North Khorasan Province

Mohammadreza Abbaszadeh
1
, Hoda Majbouri Yazdi*
2
, Hamid Panahi
3
, Hamid Hesari
4

1
Faculty of Economics and Business Administration, Ferdowsi University of Mashhad (FUM), Iran.
2
Department of Accounting, Mashhad Branch, Islamic Azad University, Mashhad, Iran.

3
Department of Accounting, Bojnourd Branch, Islamic Azad University, Bojnourd, Iran.
4
Department of Accounting, Bojnourd Branch, Islamic Azad University, Bojnourd, Iran.

A R T I C L E I NF O A B ST R A CT
Keywords:
granted facilities
withholding facilities
outstanding claims
inflation rate
guarantee



The surprising increase in the number of outstanding claims of banks in Iran is one of the recent
manifestations of the deep irregularities that have prevented the banking systemfromplaying its
main roles with regard to contributing to the countrys long-termdevelopment. These outstanding
claims mean that those who receive financial facilities, or in other words the debtors to the
banking system, either evade the repayment of the principal debt or its interest or are actually
incapable to repay their debts. This study aims to investigate some of the factors that affect the
formation of or the increase in banks outstanding claims. These factors include type of granted
facilities, type of obtained guarantee, the difference between inflation rate and interest rate of the
facilities, period of repayment as well as withholding facilities. The statistical population of this
study includes the facilities granted by all branches of Melli Bank and Mellat Bank in North
Khorasan province over the period between 2005 and 2010 that have been listed under outstanding
claims in banks accounts.
The results obtained fromtesting the studys hypotheses indicatethat among the factors studied in
this research, variables of type of facilities, difference between inflation rate and facilities interest
rate, period of repayment as well as withholding facilities are significantly correlated with the
dependable variable.

2014 Int. j. econ. manag. soc. sci. All rights reserved for TI J ournals.

1. Introduction
The main role of banks is to attract peoples funds and deposits on one hand and to use these funds for financing different economic
activities. In other words, banks are financial mediators between deposit-takers and those who apply for facilities; thus, banks use their own
resources as well as peoples deposits to supply facilities. Possessing a major portion of the societys liquidity, banks play highly sensitive
and significant roles within the economic system and leave important effects on regulation of economic relations within a society. It should
be noted that stability and persistence of these institutions requires profitability and this profitability is only guaranteed when customers and
applicants take note of deadlines and act based on trust, reliability, and good reputation so to repay their loans and credit demands. One of
the main concerns of the Central Bank, in terms of being a policy-maker and supervisor of the monetary systemof the country, is the issue
of outstanding claims (Najaf, 2008) [9]. Due to the fact that Irans monetary and financial market is bank-oriented, this issue has turned into
a national challenge .
Investigations made by experts have demonstrated that if necessary grounds are provided with regard to payment of overdue and
outstanding claims, a considerable part of resource shortage at banks would be resolved, thus enabling economic enterprises to easily enjoy
banking facilities that they are in need of to expand their activities (Report by the Iranian General Inspection Organization, 2007). Hence,
finding the roots of the problemand the factors causing the formation and increase of outstanding claims is one of the main objectives of
economic organizations in different countries and is being analyzed regularly.

2. Theoretical foundation
Outstanding Claims and their Negative Effects: Proper and timely flow of capital in the economic systemof a society is indicative of the
healthy nature of that system. This health leads to different useful consequences, such as supporting different manufacturing, trade, and
service sectors. It also increases investors motivation for making investments in these sectors. Therefore, employment rate will increase
and banks tendency to grant facilities to these sectors will be facilitated in future. This will translate to economic boost in all sectors,
enabling the government to follow its main objectives with regard to independence in manufacturing, trade, and service sectors. Among the
negative effects of the increase in outstanding claims in banks, one could mention the reduction in the price of banks stock shares and
Identification of the Factors Impacting the Increase in Outstanding Claims at Melli and Mellat Banks in North Khorasan Province
Internat i onal Journal of Economy, Management and Soci al Sci ences , 3(1) January 2014



83
market value. This reduction will increase credit risk for banks and will reduce banks ranking at the international level. As a result, it will
get very difficult to obtain loans frominternational resources when the credit risk is high. The consequence would be reduction of ratio of
capital sufficiency and reduction of access and use of international resources. It should also be noted that outstanding claims have deprived
Iranian banks from being financed through international banks. Outstanding claims leave negative effects within the country as well among
themone could mention the reduction in GDP, an increase inunemployment rate, reduction of stock exchange index, an increase in risks
and national costs, and eventually deferment of development plans.

3. Research Background
Numerous studies have been conducted with regard to non-payment the facilities, which have led to financial crisis all over the world, each
focusing on investigation of one of the causes of outstanding claims.
Hu, J in-Li, Yang Li and Yung-Ho (2006) in their study on investigating the real value of outstanding loans in banks in Taiwan
demonstrated that the banks that were governed publicly or by governments needed to spend more than private banks to decrease their
outstanding loans. In addition, when compared to the banks that were established before elimination of regulations in Taiwan, the recently
established banks need to spend twice as much of older banks for realization of each unit of decrease in their outstanding loans [7].
On the other hand, Fofack (2005) investigated outstanding loans in a series of countries in South Africa. Using statistical methodology as
well as panel data, a significant correlation was found between economic growth, strengthening of the real value of money, real interest
rate, inter-bank interest rate and some other economic factors. In addition, the study indicated that the dramatic increase in outstanding
loans is the result of major economic fluctuations, which are themselves the consequence of high sensitivity of monotonous economy of
these countries to foreign shocks [6].
Zabeen Ahmed (2004) refers to the studies conducted by Ranjan and Dhal (2003) to show that outstanding loans are affected by three
groups of fundamental factors: credit conditions, priorities related to risks associated with banks size and major economic shocks. In this
study, the hypothesis that bank size and payment period of loans negatively affects the ratio of non-flow loans was confirmed [13] [10].
Tarron Khemraj (2009) used a model like J imenez and Saurinas (2005) and a series of panel data to study a number of banks in Guyana.
The study demonstrated that strengthening local currency and increasing inflation have direct correlation and increasing GDP and size of
granted facilities have negative correlation with the size of applications. In addition, contrary to previous studies, it was proved that large
banks are less effective than smaller banks in screening credit customers [14] [8].
Dawoodi (2004) took into account such factors as type of activity, period of credits, type of credit, lack of supervision on consumption,
type of guarantees, and not following up the outstanding loans with regard to 85 companies that had obtained loans fromRefah Bank. The
study concluded that just the variables of economic activity, lack of supervision on consumption, and type of obtained guarantees are all
significantly correlated with outstanding claims [3].
Goodarzi (2005) provided a solution to decrease banks outstanding claims. This study investigated two types of factors among them
endogenous factors like skills of branch managers and training within the banking system and non-endogenous factors like inflation, rate of
banking facilities, currency exchange rate, and GDP, fromthe viewpoint of income in order to study outstanding claims within the banking
system. The results of their study indicated that the increase in inflation and GDP increase banks outstanding claims. In addition, the
increase in interest rates and currency exchange rate are reversely correlated with banks outstanding claims [4].
Baradari (2007) studied formation of banks outstanding claims and considered it an undesirable and unethical behavioural issue. Among
behavioral factors studied, variables of the applicants area of activity, type of ownership, level of education, type of guarantee, type of
contract, period in which facilities are obtained, credit history of applicant, existence of returned checks, and ratio of capital to the amount
of obtained loans are significantly correlated with outstanding claims [2].
Hashemi Nodehi (2007) studied the causes of outstanding and overdue claims of the facilities provided by Maskan Bank. The results
indicated that variables of number of branches, per capita for branch staff, and average job experience of branch personnel were greatly
affecting changes in claims. In addition, despite the increase in level of service, branch development plan decreased the possibility of
control and supervision on facilities [5].
Siroos Rezaee (2008) studied the efficiency of using credit insurances to make up for banks outstanding claims and obstacles for
development. The results demonstrated that unfamiliarity of the society with insurance, shortage of resources in insurance companies, lack
of support from the government, disagreement between banking systemand insurance industry, and the high price of credit insurance
products are among the most significant obstacles for growth of this instrument [11].
Amiri (2009), in a study entitled evaluation of effectiveness of type and value of guarantees in repayment of trade claims (a case study of
Refah Bank), investigated the type of effects and value of guarantees obtained for providing loans by banks. The results obtained fromthis
study indicate that type and value of guarantees, except for deposit guarantee and stocks do not leave direct effects on timely payment of
commitments [1].

4. Research Hypotheses
Based on theoretical foundation and background of the study, as provided in the previous parts, and based on the objective of this study, the
studys hypotheses could be defined as follows:
1. Granted facilities and outstanding claims are significantly correlated.
2. Type of facilities guarantees and outstanding claims are significantly correlated.
3. Ratio of inflation rate and interest rate and outstanding claims are significantly correlated.
4. Repayment Period and Outstanding Claims are significantly correlated.
5. Withholding facilities and outstanding claims are significantly correlated.


Mohammadreza Abbaszadeh et al.
Int ernati onal Journal of Economy, Management and Soci al Sci ences , 3(1) January 2014


84
5. Methodology
This study uses multiple linear regression analysis and indicator variable in order to fit the models. In addition, t-test is used to test the
significance level. To study the normality of the regression model, variance analysis and in order to check the significance of each variable
coefficient in the model, residuals figure is used. One-sample KolmogorovSmirnov test is used to investigate the normality of distribution
of observations. In order to tests independence of variables, Durbin-Watson test is used. Error values scatter diagram is drawn opposite the
fitted values in order to see if the variance is fixed. Eventually, in order to investigate the correlation between independent variables,
variance inflation index is used. Because of the high number of variances, the model is identified after eliminating insignificant variables,
using forward method.

6. Statistical population and sampling
The statistical population of this study includes all the facilities granted by all branches of Melli Bank and Mellat Bank in North Khorasan
province over the period of 6 years that were listed under outstanding claims inbanks accounts.
The sample is studied to discover the correlation between different factors and outstanding claims in accordance with the above definition
of statistical population for the period of the study.
Data was collected from different branches, different offices of bank supervision including trade department, department for follow-up and
reception of claims, accounting department, statistics department, etc.

7. Research variables
In this study, the dependent variable is outstanding claims and the independent variable includes type of granted facilities, type of
guarantee, ratio of inflation rate to interest rate, and period of repayment and withholding facilities.

8. Results and Discussion
Descriptive Statistics of the Data:
Mean, standard deviation, minimumand maximum for each of the quantitative variables are provided in the table below:


Table 1.Statistics of studys values for quantitative variable



As it could be seen, 21.2 per cent of the whole granted loan was outstanding during these years and the highest ratio is about 96 per cent.
Based on this table, the highest coefficient of changes pertains to ratio of inflation to interest rate and; on this basis, the lowest distribution
belongs to the period of repayment.


Results of Hypothesis:

H1: Granted facilities and outstanding claims are significantly correlated.
The final model of H1:



L: is the ratio of outstanding claims to total debt
K
1
: 1 for withholding facilities, otherwise 0
K
2
: 1 for facilities of installment repayment, otherwise 0
K
3
: for facilities of tender type, otherwise 0
K
4
: for facilities of civil participation type, otherwise 0
K
5
: for facilities of saving type, otherwise 0
K
6
: for facilities of futures type, otherwise 0
Change
coefficient
Standard
deviation
Mean Maximum Minimum M easur ing unit Number
1.177187 235854.2 200354.0 918647.0 4350.9 Million Rials 336 Granted amount
1.113929 25288.2 22701.8 111510.0 308.7 Million Rials 336 Outstanding Value
1.193396 .253 .212 .944 .011 percent 336 Granted/Outstanding
0.85 1.66 1.94 6.34 .45 Ratio 336 Ratio of inflation to interest rate
0.51462 .88 1.71 3.00 1.00 Short term ) 0 - 1 (
Mid term ) 1 - 2 (
Long term ) 2 - 3 (
336 Period of Rrepayment
Identification of the Factors Impacting the Increase in Outstanding Claims at Melli and Mellat Banks in North Khorasan Province
Internat i onal Journal of Economy, Management and Soci al Sci ences , 3(1) January 2014



85
Table2.Regression Results of Type of Facilities on Outstanding Claims after fitting the model

Te st of Significance
Degree of Freedom Total Squares Mean of Squares F-value P-value
Model 0 .438 4 0.109 60.612 0.000
Error 0 .598 331 0.002
Total 1. 035 335


Based on variance analysis table, this model is regarded to be statistically significant. About 43 per cent of outstanding claims are explained
based on type of facilities, thus the studys hypothesis is confirmed. As it could be seen in the final model, outstanding facilities are directly
correlated with the independent variable (outstanding claims) and installment sale, civil participation, and futures are reversely correlated
with the dependent variable. In other words, the higher withholding facilities, the higher would be outstanding claims and the more
installment sale, civil participation, and futures are used, the lower would be outstanding claims.

H2: Facilities Guarantee and outstanding claims are significantly correlated.
The final model of H2:



L: is the ratio of outstanding claims to the total debt
K
1
: 1 for a guarantee of a saving type, otherwise 0
K
2
: 1 for immovable guarantee, otherwise 0
K
3
:1 for a guarantee of third-person commitment, otherwise 0.

Table 3.Regression Results of Guarantee type on Outstanding Claims
Test of Significance
Degree of Freedom Total Squares Mean of Squares F-value P-value
Model 0 .000 3 0.000 0.000 1.000
Error 1. 035 332 0.003
Total 1. 035 335

Based on variance analysis table, the model is not statistically significant. As it could be seen in the above model, there is no difference in
outstanding claims for different guarantees.

H3: Ratio of inflation rate and interest rate and outstanding claims are significantly correlated.
The final model of H3:


L: is the ratio of outstanding claims to total debt
K
1
: is the ratio of inflation rate to interest rate of facilities


Table 4.Regression Results of the Ratio of Inflation Rateto Interest Rateon Outstanding Claims
Test of Significance
Degree of Freedom Total Squares Mean of Squares F-value P-value
Model 0 .232 1 0.232 96. 568 0.000
Error 0 .803 334 0.002
Total 1. 035 335

Based on variance analysis table, the model is statistically significant and 22 per cent of the outstanding claims could be explained based on
the ratio of inflation to bank interest rate. Thus, with the increase in the ratio of inflation to interest rate, outstanding claims increase as
well.


H4: Repayment Period and Outstanding Claims are significantly correlated.
The final model of H4:


L: is the ratio of outstanding claims to the total debt
K
1
: repayment period
Mohammadreza Abbaszadeh et al.
Int ernati onal Journal of Economy, Management and Soci al Sci ences , 3(1) January 2014


86

Table 5.Regression results of repayment period on outstanding claims
Test of Significance
Degree of Freedom Total Squa res Mean of Squares F-value P-value
Model 0.044 1 0.044 14. 768 0.000
Error 0.992 334 0.003
Total 1. 035 335

Based on variance analysis table, the model is statistically significant and about 4 per cent of the outstanding claims could be explained
based on repayment period. Thus, with the increase in the repayment period, outstanding claims decrease.


H5: Withholding facilities and outstanding claims are significantly correlated.
As it was explained inH1, due to the probability value related to the significance of model, the null hypothesis is rejected at the level of 5
per cent. Thus, it could be said with 95% confidence that the highest effect on outstanding claims belongs to withholding facilities.


Multiple Regression Model
In this part of the article, the variables are going to be examined. Due to the high number of variables, here the model is only identified after
elimination of insignificant variables using the forward method.

Table 6.Regression pertaining to supplementary test using forward method
Test of Significance
Degree of Freedom Total Squares Mean of Squares F-value P-value
Model 0.542 7 0.077 51.428 0.000
Error 0.494 328 0.002
Total 1.035 335


Table 7.Prameter Estimation
Parameter Estimation
Estimate Standard deviation T_value P_value
(Constant) .904 .006 158.263 .000
Withholding facilities .031 .008 3.739 .000
Ratio of inflation rate and interest
rat
.00014 .000 8.146 .000
Tender -.001 .008 -.181 .857
Civil participation -.061 .008 -7.712 .000
installment sale -.053 .008 -6.665 .000
futures -.042 .008 -5.307 .000
saving -.034 .008 -4.048 .000


Therefore, the following model is obtained:
L 0.05=0,904 +0.031 withholding +000014 Inflation Ratio -0.001 Tender -0,061 participation 0.053 installment sale 0,042 futures
0.034 saving

9. Conclusions and recommendations
With regard to H1, which pertains to type of granted facilities and outstanding claims, based on the regression model, it was identified that
tender facilities, saving, and royalty do not impact outstanding claims. In addition, installment sale, civil participation, and futures are
reversely correlated with outstanding claims. In other words, by the increase of installment sale, civil participation and futures, outstanding
claims decrease.
Tests were conducted to study the effect of type of guarantee on formation of outstanding claims. The results demonstrated that type of
obtained guarantee could not affect outstanding claims. Since no significant correlation was observed at the confidence level of 95 per cent
between these variable and outstanding claims, it could be said that value of obtained guarantee fromthose whose claims have remained
Identification of the Factors Impacting the Increase in Outstanding Claims at Melli and Mellat Banks in North Khorasan Province
Internat i onal Journal of Economy, Management and Soci al Sci ences , 3(1) January 2014



87
outstanding is significantly higher than those with no outstanding claims; meanwhile, this has not stopped the claims to become
outstanding.
Concerning the effect of ratio of inflation rate to interest rate on outstanding claims, the regression model indicated that there is a
significant correlation between inflation rate and interest rate. This significant is at the confidence level of 95 per cent. The results indicate
that the existence of difference between interest rate and inflation rate is one of the factors for the formation of outstanding claims and it
could potentially be considered one of the main factors of behavioral risk in credit behavior of customers and thus the increase in banks
outstanding claims.
The results also demonstrate that the shorter period of repayment might cause problems for the loan-taker with regard to repaying the debt.
This could be the result of lack of expected return in a limited period of time. On this basis, the increase in the repayment period decreases
outstanding claims. As it was stated above, withholding facilities have the highest effect on outstanding claims; therefore, these facilities
need to reach the minimumlevel. This particularly persists whenthe applicants of these facilities have no (or little) capital and they start
their business only by using the banks asset. This dramatically increases the risk associated with non-repayment.

The following recommendations for future research are presented as follows:

1- Since withholding facilities formthe highest portion of outstanding claims, it is necessary for the related authorities to find solutions to
allocate these loans fromsources other than peoples resources at banks. This could be allocation of government budget along with
continuing supervision before and after provision of facilities and through related organizations like banks, province departments and the
like to ensure that resources are properly used as loss of peoples resources at banks could leave irreparable harmon the countrys
economy.
2- Branch managers are recommended to pay closer attention to the difference between inflation rate and interest rate of granted facilities
when they approve these facilities as customers are likely to use the received funds in the free market, eventually cause further irregularities
in the economy. Hence, strategies need to develop to have step-by-step supervision on the use of facilities and to prevent inaccurate
application of the facilities.

References
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