Bank lending technology and credit availability impact in pakistan banking

sector

Introduction
This term paper is on bank lending and credit availability impact in pakistan banking sector and we talk
briefly on it in futher points.

Background of study
The major functions of banks are received money from surplus (deposits) and send money to
deficit (creditor)(Bakar, Yasin et al. 2019). Bank provide these facilities from the past. After the
crises of 2007-2008 bank follow the rules of basal III to reduce the credit risk(Allen, Chan et al.
2012). Bank use the lending technologies for the purpose of lending credit. There are two types
of lending technologies: Asset based lending and relationship lending. Bank use the lending
technique on the basis of lending decision. Asset based lending is a hard quantitative information
and relationship lending is basically a soft qualitative information of borrower repayment
capacity(Elyasiani and Goldberg 2004, Berger and Udell 2006, Bartoli, Ferri et al. 2013). In
other words Bank use the firm financial reports , credit history and other hard information which
bank need to identify the what is the risk percentage in that on asset based landing but in
relationship lending bank basically see the loyalty of customer its past transactions with him and
give customer some extra facility. In this research we find out the which lending technology use
in pakistan and the role in banking sector.

This research will help you out to know about the lending technology and importance of it.
Further more will tell you the role of lending technology in banking sector and use of it.
Basically when bank is going to give any kind of credit, first of all they use different methods to
calculate the risk. There are many past methods (i) financial statement lending (ii) assets based
lending, (iii)credit scoring, (iv)relationship lending(Berger and Udell 2002) , but now asset based
lending and relationship lending are useable. Bank use the external sources to excess these data
and measure the risk. These technologies not only useful for banks but also for financial
institution who lend the money.
Significance of study
Basically banks great earnings come from lending loan to firm and others. The study of this
paper is important for the management of credit department of banks and for the management of
State bank of pakistan to know about which method is use full for lending purpose and how
much loans are secure. Through this paper it is very easy to know about the current situation of
pakistan banking sector according to lending technology.
Objective
 To find out importance of lending technology in pakistan and how it enhance the banking
sector.
 Has lending technology a significant role if yes then which method has a great role.
In pakistan its very difficult for small business to access the credit because they not prepare the
financial statement. In the past paper on crises of 2007-2008 in which researchers say that in the
lending methods only asset based method has a significant impact on the banking sector but
relationship method has not impact on banks(Ferri, Murro et al. 2019).

In the journal article which title is Lending technologies, loan pricing and customer profitability
in SME lending. The writer discuss about the indirect impact of lending methods on loan pricing
and customer chances of in bank–institutions relationships. The researcher use the data of small
and medium-sized privately held firms domiciled in Finland. The variables are uses in it loan
pricing, rating, customer profitability, loan size, firm size, length, scope, depth and firm
profitability. In which the loan pricing and customer profitability are independent variables
and others are dependent variables. The model which was use by researcher was PLS (Partial
Least Squares) path modeling.

In the finding and conclusion researcher said that the role of qualitative data which mean soft
data in bank–institution relationships is emphasized more in loan agreement than assets based
information is. Which mean the relationship lending has not a significant impact then asset based
lending(Fredriksson).

In the second journal article which title is BANK LENDING TECHNOLOGIES AND CREDIT
AVAILABILITY IN EUROPE. WHAT CAN WE LEARN FROM THE CRISIS? In which the
researcher research on how differences in main banks’ lending method and use of soft data
affected banks’ credit availability during the 2007-2009 crisis. Writer use the data of 15,000
manufacturing firms in seven European countries: Austria, France, Germany, Hungary, Italy,
Spain and UK. The survey is held in 2010 The questionnaire submitted to the surveyed firms
covers different broad areas: firm ownership structure and governance systems, workforce
characteristics, innovation and internationalization activities, market structure and competition,
financial conditions and bank-firm relationships. The variables which were uses Rationing,
strong rationing, wide rationing, relationship lending, transaction lending, soft information,
age ,size, debt ration , liquidity ratio, differential ratio, capital intensity, labour production,
number of banks , groups and duration. The researcher test the result with univariate test and
correlation matrix. According to the researcher find that the chance of credit rationing is great
for their similar transaction. The mean of this is that the soft data has a good effect but
transactional lending has a little effect. During crises bank reducing credit exclusion during
crises requires either relationship lending or enticing transactional banks to use soft
information(Ferri, Murro et al. 2019).

The third article title is Lending Relationships and the Effect of Bank Distress: Evidence from the
2007–2009 Financial Crisis. The researcher was discussion on the transmission of bank distress
to nonfinancial firms from 34 countries during the 2007–2009 financial crisis using systemic and
bank-specific shocks. They include all loans initiated before the financial crisis, between 2003
and 2006. The variables which were uses Asset, Market to book, leverage , cash, stock
volatility, number analysts, bond issue, share bond issue, number main banks, share volume,
share number, Herfindahl volume and Herfindahl number. For the result researcher use
different regression model.

In the find that bank financially not good is associated with equity losses and lending cuts to
creditors with the strongest lending relationships with banks. The losses are not off set by
creditor access to public markets of debt and targeted to institutions with the huge information
asymmetry problems and not good financial positions(Carvalho, Ferreira et al. 2015).
Research Question
Find out the which lending technology use in pakistan and Impact of lending technology in
banking sector of pakistan.

Hypotheses
Hypotheses (I): relationship lending will help out small business to access credit without prepare
financial statement in pakistan
Hypotheses (0): relationship lending will not help out small business to access credit without
prepare financial statement in pakistan
Short Summary
This term paper is on lending technology here we discuss about two methods. In which the first
one is asset based lending this is on quantitative form. The second one is relationship base
lending and this is on qualitative form. The term paper has five parts, first part is about
introduction in which we tell the back ground , importance of study, objective and question is the
impact of lending technology in banking sector of pakistan. In next part is on literature review of
lending technology and the third one tell about methods and data which are use or useable in this
term paper. In third part we use some independent and dependent variables. The last one is on
our result and conclusion which is totally depend on our prediction.

Literature Review
According to Investor’s funding are very risky. So banks reduce the risk by making different
loan contracts and different terms and conditions that can be in favor of banks. When banks
increase the loan amount in the relationship form then make the term in the response of company
performance. Asset based lending is the only source of investment for small business and solve
the economic problem of funding. There are two financial instruments according to execution of
effectiveness. The first one is equity, a money related instrument that has no exhibition
affectability: the terms of an investor's funding don't change because of the guarantor's
performance. Debt, on the other hand, has increase degrees of execution affectability. For debt,
execution affectability implies that as a borrower's performance decrease, the credit's financing
cost or other part of the advance changes to reduce the loan risk.(Shadab 2013) Asset based
lending are moderately not well known to specialists and have gotten little consideration by
researchers(Alan and Gaur 2018), they are significant in light of the fact that they are the main
kind of advance where the measure of credit accessible to the borrower modifies dependent on
the estimation of its assets. So in that way Asset based lending are execution affectability. In any
case, not at all like advances that just have an exhibition valuing highlight that acclimates to the
presentation of the borrower at the substance level, Asset based advances change in accordance
with the presentation of the borrower's benefits—their capacity to produce money. Asset based
advances are less risky its mean secured(Shadab 2012), verified advances regularly don't change
in size dependent on resource execution(Shadab 2013).
We should initial specify what's meant by “security." In Anglo-American law secured finance
provides quality primarily based priority loan. A secured debt additionally typically has full
priority over any risky claim in bankruptcy however solely up to the worth of the collateral. Any
portion of the secured lender's claim which isn't happy by the assets that during which the
safety interest was taken ranks as the other unsecured loan. historically this quality primarily
based facet of secured disposal was explained as an immediate consequence of the fact that the
safety interest was associated interest within the collateral(Siebrasse 1997). Relationship
investment has progressively a part of interest for banking sector , and notably for smaller
entities. it's special for prudent lenders to assemble data regarding the credit goodness of the
borrowers. There area unit many ways in which to get this data,
However one methodology that's particularly well matched for opaque firms is that
the development of long relationships between investor and recipient. Lenders have many
substitute information which link to borrowers. They'll need potential borrowers to submit
applications for loans and to produce specific financial info. as an alternative,
lenders could believe a lot of heavily on their personal relation with the potential receiver.
This relationship could have developed as a result of the investor has
provided numerous forms of financial services to the receiver within the past and
learned vital info associated with the chance that the potential loan are going to
be repay(Elyasiani and Goldberg 2004).
In Europe, Cosci et al. (2015) and Cucculelli et al. (2016) notice that corporations providing
soft data in their disposition relationships area unit less possible to be
credit distributed and a lot of possible to make it better. Agarwal and Hauswald (2010)
counsel that additional freelance branches manufacture additional soft data. Ogura and
Uchida (2014) realize that little regional banks square measure seemed
to place bigger stress on soft data than giant national money intermediaries. Petersen (2004)
says that, hard data is quantitative , straightforward to store and transfer from one place to
other, and its content is freelance of the gathering method. Conversely, soft data is
qualitative, typically communicated in words, and dangerous to store and transmit
to alternative parties. Also, soft info content is considerably full of the gathering
method and therefore the collector (bank) characteristics(Ferri, Murro et al. 2019). Bosch
(2006) examined each personal and public corporations to explore the result of data spatial
property on loan spreads. He found that lenders charge higher spreads once the firm lacks in
public out there data. However, he found that a bank–firm relationship mitigates
this data inequality and might facilitate scale back the unfold. He ended that loan
spreads ar littered with the number of in public out there firm data and therefore the nature
of a bank–firm relationship. The finding recommended that there's higher demand for deeper
and additional intensive bank– firm relationships for unpublic held firms than for
public corporations, that is critical so as to mitigate data inequality(Fredriksson). As larger
banks ar the foremost involved with the issues associated to the assembly and
transmission of data and therefore the most ready
to manage advanced credit evaluation models, that they had the best incentive to with
efficiency mix transactional disposition techniques and soft qualitative knowledge
throughout the crisis. In distinction, little native banks, typically wishing on relative
disposition technologies, failed to effectively exploit the advantages related to the combined
adoption of transactional disposition techniques and soft data(Ferri, Murro et al. 2019).

Method and Data

The method which is use in this term paper is regression model. We use variables in which some
independent and others are dependent. The reason behind of use this model is that this model use
by many researchers and results are come accurately right. The other reason is that this model is
useful for variables which use in this paper. The independent variables are use (i) Experience in
business (ii) transparency of Balance Sheet (iii) Growth of business and dependent variables are
(i) performance, (ii) Assets, (iii) Profit, (iv) liquidity. The formula of regression model is like
dependent variable in multiple regression.
Y = B0+B1X1+B2X2 +……+BpXp + e
Here Y show the dependent variable, B show coefficient, X show independent variable and e
show the error. For the result we test the coefficient relationship of variables. We collect the
primary data from the questionnaire and some interviews. The interview will be taken of
researchers and bank managers. We collect the data from five big banks and three middle banks.
The banks name are National Bank of pakistan Ltd, Habib Bank Limited, United Bank Ltd,
MCB Ltd, Allied Bank Ltd, Summit Bank Ltd, Silk Bank Ltd, and Faysal Bank Ltd. According
to our collecting data show that it is quantitative research.

Result and conclusion.

The result show that in over first variables that if experience in business is great then the
performance of business and assets automatically increase which mean the credit secure chance
are good. So if creditor have assets increase then he can simply give a collateral to secure the
loan. In our seconde variable transparence of Balance Sheet show that if a company want any
loan then he must show the balance sheet or any other evidence of its income so here is our
hypotheses (o) is correct which mean relationship lending will not help out small business to
access credit without prepare financial statement in pakistan. When firm show the real statement
so bank can analysis of credit risk according to its profits and performance. In the last variable
show that if Growth of Business is high so its liquidity and other dependent variables have good
impact.

In the end after summarize the data show that landing technologies have a impact in the banking
sector of pakistan and also on credit availability. In these lending technologies the significant
affect of Assets Base lending and the other one relationship lending have no significant affect on
lending and banking sector. Because according to current situation of pakistan bank need to
secure the loan and the best way to secure the credit is Assets Base Lending. our prediction is
correct according to other researchers, in which one researcher say that the credit rationing
probability increase in the lending process and not see any clear evidence of great role of
relationship technic. So Estimation results additionally unconcealed that the assembly of
qualitative data reduced the likelihood of corporations experiencing credit restrictions(Ferri,
Murro et al. 2019). The results said that loan evaluation didn't have a major association
with creditor profit for the corporations that area unit divided into
relationship credit technologies. On the other side, loan evaluation had a considerable
stronger positive association with creditor profit for corporations that area
unit divided into hard information credit technologies(Fredriksson). So according to over
research question the assets base method is use in Pakistan to secure the loan.
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