Sections 4, 5 and 6 provide details of the information collected, namely, the loan decision-making system (Section 4), the loan pricing system (Section 5) and ways to build a customer relationship and collect and retain the customer information (Section 6) by type of bank (regional bank or shinkin). An informed bank can also differentiate its services by taking advantage of the informational advantage. Distribution of Decision-Making Authority for the Lending and Use of Soft Information Soft information can be difficult to transmit not only between organizations but also within any organization.
Qualitative Empirical Questions
The agent can use soft information that he collects himself to maximize his own payout. Therefore, the agent is more willing to collect soft information in a more decentralized organization; As a result, a bank with a decentralized structure may enjoy a comparative advantage in offering relationship banking.
Interview Survey of Financial Institutions: Outline of Survey Procedures and Results
The decision-making process for lending and its conditions; loan amount, interest rate, maturity and repayment plan. How has the introduction of the Financial Inspection Manual published by the Financial Service Agency changed the lending decision. What are the deciding factors (eg, length of business relationship, share of .. business, scope of relationship, information provided by customer and involvement in corporate governance) in determining depth of relationship.
Expectations for public support, including a public credit guarantee and support for government-owned financial institutions. Consequences of the shift from full to partial guarantee of the public credit guarantee system. The selection of the financial institutions covered by the interview survey was limited to regional financial institutions, regional banks, regional banks II and shinkin banks, which are considered to attach importance to relationship banking.
Shinkin Banks: Asahi Shinkin Bank, Johoku Shinkin Bank, Kawasaki Shinkin Bank, Mishima Shinkin Bank, Ome Shinkin Bank, Sagami Shinkin Bank, Seibu Shinkin Bank, Sugamo Shinkin Bank, Tama Shinkin Bank, Tokyo Higashi Shinkin Bank and Yokohama Shinkin Bank (11) banks). The manager, section manager and assistant section manager of the credit department of each bank answered the interview survey; in some financial institutions they were accompanied by staff from the loan planning department, the management planning department and the sales department.
Credit-decision System and Lending-decision Process
Regional Banks (i) Credit-decision System
The functions of the credit department are largely divided into credit decision and credit management. In the case of a regional bank in a large metropolitan area, competing with megabanks, the branch manager's decision-making power in terms of the total amount of credit amounts to 1–2 billion yen. Within a branch, the scope of authority to set loan terms is delegated by the branch manager to a loan officer.
The ratio of the number of decisions taken by branches to those taken by headquarters varies greatly in large regional banks. In some regional banks, most decisions are made at the branch, while head office makes the final decision on half of loan applications. Although decisions are made in the branch offices as often as in the head office, the head office takes an overwhelming share (about 90%) of the decisions based on the total amount of loans.
More decision-making powers are delegated to branch managers in larger regional banks in rural areas due to the advanced credit risk management and the intention to strengthen relationship banking. It is noteworthy that while branch managers get more. powers in large regional banks that compete with megabanks, the authority of branch managers in smaller regional banks that compete with shinkin banks and regional banks II has not been expanded. iii) Organizational structure of the head office and branch offices and the speed of processing loan applications.
Shinkin Banks
The branch manager's decision-making authority is determined based on the rank of the branch in some, but not all, Shinkin banks. Some shinkin banks set the scope of decision-making authority based on data from a three-dimensional matrix consisting of a branch's rank, unsecured loan amount, and total loan value. The upper limit of decision-making authority for the total loan value of a branch manager is set at 100 million yen or more at some shinkin banks, while other banks set it at 50 million yen or more or around 30 million yen.
The ratio of the upper limit for the amount of the unsecured loan to the upper limit for the total value of the loan varies from bank to bank. While, in most banks, the upper limit of the unsecured loan is about 10 percent of the total value of the loan, it can reach up to 30 percent. The decision-making ratio for head office and branch loans is 50:50 in most banks.
Banks that delegate greater decision-making authority to branch managers generally show a higher percentage of loans approved at the branch, although there are some exceptions. iii) Organizational structure of head offices and branches and the speed of processing credit requests. In some banks, the credit decision is completed in a longer period for new customers than for existing customers, and the speed of the credit decision may vary depending on whether it is carried out at a branch or at the head office.
Loan Pricing System 1. Regional Banks
Shinkin Banks
Many banks determine the base rate by adding the spread predetermined by the three-dimensional matrix based on three factors: the internal creditworthiness based on the financial data, the term of the loan and the collateral/guarantee at the lower limit , namely the short-term primary interest rate or the sum of the financing costs and the administrative costs per fund unit. Although the credit rating is used to set the base interest rate at all banks, the use of the term and coverage of loan guarantees varies from bank to bank. When setting the base rate based on the credit rating, many banks determine the spread to be added to the lower bound interest rate, such as the short-term prime rate, by estimating the probability of default associated with a particular credit rating based on a certain statistical model and the expected loss obtained by multiplying the estimated probability of default by the recovery rate.
At the same time, some banks set the base rate based on the bank-wide profit target to cover the bank's cost of capital. The financial data used for credit assessment is reviewed based on the actual information collected by a branch loan officer, who meets with a company's manager and examines the business situation on the spot. In many cases, the data is revised to reflect the inadequacy of depreciation, inventory contents, long-term non-performing loans, and loans to a company's president.
In fact, many respondents indicated that 50 to 70% of the data used for credit decision-making and credit pricing was qualitative data, particularly with respect to small firms. These banks also pointed out that when loans are covered by the public loan guarantee, loan decisions and monitoring tend to be weak even after the introduction of joint liability.
How to Establish Relationships and Collect and Accumulate Information 1. Regional Banks
Shinkin Banks
A loan officer of a shinkin bank visits existing customers primarily to raise funds and build relationships. The typical number of loan officers at many banks ranges from 20 to 30 percent of the total staff. The number of corporate clients under management of each typical loan officer is approximately 40 to 50 clients.
In an area in which the majority of accounts are held by individual clients and the number of corporate accounts is small, a loan officer may have as few as 10 to 20 corporate clients. A loan officer visits each corporate client at least once a month and, in some cases, daily. At many banks, such information is managed at the branch level, and a system is put in place whereby the management of information is not interrupted by changes in loan officers.
Although financial data is stored in a database that is accessible to all branches in many banks, few banks have established a system that makes quality information accessible to all branches. ii) Controlling accounts as a source of information. Officials at shinkin banks generally believe that account settlement information is important for real-time monitoring of cash flow.
Concluding Remarks
The branch manager's discretion seems to depend on the branch's performance evaluation criteria in each bank. It is possible that a loan would be approved based on qualitative soft information, but it would rarely affect the loan price and other loan terms. Officials of financial institutions reported that such practices decreased after the implementation of the Internal Rating System.
In fact, the internal base rate for each customer is determined on the basis of the three-dimensional matrix of credit ratings, the term of the loan and the coverage ratio after admission. The introduction of the total profitability-based interest rate will strengthen the relationship between the volume of banking business and the breadth of relationships, as it widens the scope to further lower the interest rate. In response to this price competition, shinkin banks and other small financial institutions place the greatest emphasis on advisory capacity to improve their business management of the customer.
In particular, information such as the extent of the decision-making power delegated to the branch manager, the rejection rate of loan applications at the head office, the introduction of qualitative assessment points in the internal credit assessment, the criteria for assessing the performance of the branch office, the introduction of a customer management system focusing on the overall profitability of each customer , the emphasis on additional services, the training system for loan officers and the reliance on the credit guarantee system are important to verify the importance of qualitative information. Bank Reputation, Bank Commitment, and the Effects of Competition in Credit Markets.” Review of Financial Studies.