Supervisory Incentives and Credit Portfolio Management: A Field Experiment and Findings

Abstract

An agency problem regarding moral hazard of individual borrowers within lending contracts is efficiently addressed with supervisory practices, especially sponsorship and endorsement that lead to selecting the optimal project (with higher expected return and lower risk) and the optimal control of borrowers. According to a recent study, there is a liability constraint of the endorsement that plays as an incentive mechanism for better projects selecting and an incentive constraint of the sponsorship that plays for better monitoring of borrowers, (Kamalan, 2018). Although the conclusions are very relevant in economics with a broad range of applications in management field, especially in marketing, the results of the modelling remain theoretical. The overall objective of this study is to analyze the effectiveness of incentive mechanisms on maturity repayment behavior of borrowers and the time of exposure to default. Specifically, the article aims at testing empirically the causal effects of supervisory practices within lending contracts with a focus on the maturity repayment behavior of borrowers.

First, we test the influence of supervisory incentives on the borrower’s behavior regarding maturity repayment with Logistic and Poisson regression. Second, we analyze the effects of supervisory incentives on credit’ life-time of borrowers with Kaplan-Meier and Cox regression.

The findings attest that supervisory incentives are significantly powerful to lead borrowers to better maturity repayment behavior. The resulting model is significant to introduce into the search for the determinants of categories of "best" customers in maturity repayment and adversely, those mostly considered as vulnerable to delays that will lead to a real strategy of portfolio management.

Keywords: Principal-Supervisor-Agent, Incentives, Logit, Poisson regression, Survival analysis, Censoring, Cox regression

JEL Codes: C14, C24, C25, C41, D91

DOI: 10.7176/EJBM/11-12-25

Publication date: April 30^th 2019