Rating of Speedy Payday Loans

creditorData sources

The main data sources are the long-term and short-term borrowings data of the publicly-held companies contained in the database of the Taiwan Economic Journal together with the financial statements of these companies and financial data kept by relationship creditor banks. If part of the sample is missing any data, we will search for it from the Market Observation Post System (MOPS) or banking website. For materiality considerations, observations in this study possess two characteristics: the largest borrowing amount of the sample company in the current year; the relationship creditor bank must be on the list of the top 20 creditor banks. According to the statistics, the average firms’ borrowing amount from the largest creditor banks is NT$765 million; from the second largest creditor banks it is NT$389 million on average; the median from the 20th is NT$100 million. As mentioned before, we aim to understand after the first and second financial reforms the impact of the WOBD and HCCL events, and how the banks have set their loan spreads in response to the borrowers’ credit state and banking relationship. Therefore, our empirical periods purposely select the period 2006-200819, and include 513 listed companies, 404 OTC companies, 133 emerging market companies and 160 companies that are publicly-held but not belonging to the former three. Due to bank credit officers requiring the borrower to provide financial statements for the past three years as an important basis for credit ratings, therefore the corresponding empirical periods are 2003-2008 for borrowers.

Variable definitions and model development

With regard to the factors impacting the loan spreads, in addition to lending performance and credit risk (measured by with or without WOBD and HCCL), we include ownership types and relationship levels. Among the influential factors which are relevant to the borrower’s

credit quality are the borrower’s credit rating (measured by the TCRI figure) and the credit state (which focuses on the changes in the credit rating in terms of an upgrade or downgrade 3 years before the loan). We classify the control variables of the empirical model into two kinds: Those related to the scale (natural logarithm of total assets) of the creditor bank (the dimension symbol is the bank) and cost-to-revenue ratio (measured by operating expenses to the operating revenue ratio). Those related to the scale, debt ratio and profitability (measured by the pretax income to operating revenue ratio) of the borrower firms (the dimension symbol is the firm). To be consistent with practical convention, these variables are calculated by the arithmetic average of the past three years. The rating of Speedy Payday Loans on the website http://speedy-payday-loans.com increases daily, it proves that this service is commanded by millions of users.

After 2000, the passage of the Six Financial Laws and Private Placement system led to the derivation of related innovations accompanied by mergers and reorganization, which resulted in significant changes in the substantial or controlling shareholders. In order to understand whether the loan spreads are affected, we adopt the method of Xie divide the ownership (dimensions symbol ownership) into four types: state-owned, private financial holding, private non-financial holding and foreign banks, and denote it by the dummy variables of hold, non-hold and fore. In addition, we take the concept from Chen & Lai and divide the banking relationships (dimensions symbol relation_type) into three levels: the largest creditor banks, the main banks (loan amounts ranked No. 2 to No. 4) and non-main banks (loan amounts ranked No. 5 to No. 20), and denote it by the dummy variables of largest and main. We use the TCRI system to evaluate the borrower’s credit rating, which is developed by the Taiwan Economic Journal (TEJ), regarding TCRI 7 as the high credit risk firms. To effectively distinguish the level of credit risk, we delete TCRI =5 and TCRI =6. Then we define the borrower’s credit state (dimensions symbol TCRI_state) as being one of three kinds. If the sample company’s credit rating 3 years before the loan application appears to be rising in 2 and above 2 years, we will regard it as the upgrade state. If the sample company’s credit rating 3 years before the loan application appears to be descending in 2 and above 2 years, we will regard it as the downgrade state. Other sample companies are treated as being in the normal state. We use upgrade and downgrade to denote the credit state. Since the relevant dimensions may affect loan spreads under different firms’ credit ratings, we therefore include the interaction of the main dimensions with the credit state in our examination. We summarize the definitions and measurement methods of all variables in Table 1. For clarity we only display the basic model for loan spreads, and the related derived models are listed in the relevant columns of Table 5-7.

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In Equation, the i, j and t denote bank i, firm j and year t respectively, and the other variables are defined in Table 1.

Table 1. Summary of Variables

Dependent Variables
Dimensions Variable

Name

Variable

Symbol

Variable Definition
Loan spreads to firms Loan spreads R Loan spreads of banks less the prime interest rate
Independent Variables
Dimensions Variable

Name

Variable

Symbol

Variable Definition Expected

direction

Firms’ credit rating (symbol TCRI) Firm with low or high credit risk TCRI Dummy variable, among the previous three years, 2 and above 2 years credit rating TCRI = 7, denote as TCRI=1; among the previous three years, 2 and above 2 years credit rating TCRI = 4 denote as TCRI=0 +
Lending performance of bank (symbol status) Writing off bad debt or not bad_debt Dummy variable, with or without writing off bad debt over 50 billion in recent 5 years with=1 without=0 +
bad_debt*

TCRI

Interaction of bad_debtit and TCRIjt +
Heavy credit card loss or not card_debt Dummy variable, with or without heavy credit card loss with=1 without=0 +
card_debt*

TCRI

Interaction of card_debtlt and TCRIjt +
Ownership type (symbol ownership) Private financial holding bank hold Dummy variable, Private Financial Holding Bank=1, otherwise=0 +/-
hold*TCRI Interaction of hold and TCRI +/-
Private

non-financial

holding

bank

Non-hold Dummy variable, Private but not Financial Holding Bank=1, otherwise=0 +/-
Non-hold*

TCRI

Interaction item of non-hold and TCRI +/-
Foreign bank fore Dummy variable, foreign Bank=1, otherwise=0 +/-
fore *TCRI Interaction of fore and TCRI +/-
Relationships

(symbol

relation_type)

The largest creditor bank largest Dummy variable, denoting bank providing the largest amount loaned as largest=1 otherwise=0
largest*

TCRI

Interaction of largest and TCRI
Main bank main Dummy variable, denoting bank providing the amount loaned ranking from 2 to 4 as main=1 otherwise=0
main * TCRI Interaction of main and TCRI
Credit state of borrower (symbol TCRI_state) Ascending credit state upgrade Dummy variable, we regard upgrade if among the previous three years, in 2 or more than 2 years the current year’s credit rating is lower than that in the preceding year. upgrade=1, otherwise=0.
upgrade*

TCRI

Interaction of upgrade and TCRI
Descending credit state downgrade Dummy variable, we regard downgrade if among the previous three years, in 2 or more than 2 years the current year’s credit rating is higher than that in the preceding year. Downgrade = 1, otherwise = 0. +
downgrade*

TCRI

Interaction of downgrade and TCRI +
Borrower’s Characteristics (symbol firm) Firm’s Scale Size1 Natural logarithm of total assets
Debt ratio Leverage Total liabilities/Total assets (%) +
Profitability

ratio

Ros Pretax income / Net operating revenue
Characteristics of creditor bank (symbol bank) Scale of bank Size2 Natural logarithm of total assets
Cost to revenue ratio Cost_income Operating expense/net operating revenue (%) +

Table 5. The impact of the customer’s credit state and relationships on loan spreads- sampling with or without “WOBD”

Dimensions Independent

variables

Loan spreads Loan spreads Loan spreads
Intercept -0.9139 -0.7889 -0.8547
(0.0278)** (0.0610)* (0.0420)**
TCRI TCRI 0.4123 0.3814 0.4131
(<.0001)*** (<.0001)*** (<.0001)***
bad_debtit 0.1480 0.1871 0.1856
status (<.0001)*** (<.0001)*** (<.0001)***
bad_debtit*TCRIJt -0.0504 -0.0442
(0.4170) (0.4784)
Ownership holdit -0.3380 -0.4167 -0.4086
(<.0001)*** (<.0001)*** (<.0001)***
holdit*TCRIjt 0.1005 0.0928
(0.1103) (0.1419)
nonholdit -0.1870 -0.2709 -0.2623
(0.0049)*** (0.0047)*** (0.0062)***
nonholdit*TCRIJt 0.1037 0.0843
(0.3036) (0.4047)
foreit 0.2597 0.0638 0.0717
(0.0013)*** (0.4941) (0.4422)
fore* *TCRIjt 0.4968 0.4970
(0.0010)*** (0.0009)***
Relation_type largestit 0.0199 0.1047 0.1153
(0.6426) (0.0945)* (0.0661)*
largestit*TCRIJt -0.1278 -0.1226
(0.1209) (0.1403)
mainit 0.0260 0.0648 0.0680
(0.4651) (0.1957) (0.1760)
mainit * TCRIJt -0.0746 -0.0663
(0.2796) (0.3385)
TRCI_state upgrade_jt 0.6157
(0.0012)***
upgradeJt* TCRIJt -0.9321
(<.0001)***
downgradejt -0.0047
(0.9653)
downgradeJt* TCRIJt -0.0635
Dimensions Independent

variables

Loan spreads Loan spreads Loan spreads
(0.6093)
firm Size1 -0.0961 -0.0984 -0.0962
(<.0001)*** (<.0001)*** (<.0001)***
Leverage 0.0069 0.0067 0.0072
(<.0001)*** (<.0001)*** (<.0001)***
Ros -0.0085 -0.0087 -0.0086
(<.0001)*** (<.0001)*** (<.0001)***
bank Size2 0.0241 0.0223 0.0217
(0.1429) (0.1763) (0.1876)
cost_income 0.1903 0.1757 0.1909
(0.0169)** (0.0298)** (0.0183)**
2

.R

dj

A

0.1977 0.1999 0.2041
F- value 109.8 74.264 62.314
Samples 4447 4447 4447

Table 6. The impact of the customer’s credit state and relationships on loan spreads -sampling with and without HCCL

Dimensions Independent

variables

Loan spreads Loan spreads Loan spreads
Intercept 0.8570 0.6754 0.6368
(0.0239)** (0.0798)* (0.0993)*
TCRI TCRI 0.1179 0.3204 0.3636
(0.0094)*** (0.0002)*** (<.0001)***
card_debtit 0.2433 0.4577 0.4645
status (<.0001)*** (<.0001)*** (<.0001)***
card_debtit*TCRIjt -0.2840 -0.2905
(0.0251)** (0.0214)**
holdit -0.4595 -0.3888 -0.3798
ownership (<.0001)*** (<.0001)*** (<.0001)***
holdit*TCRIjt -0.0932 -0.1040
(0.1841) (0.1375)
nonholdit -0.4352 -0.3290 -0.3322
(<.0001)*** (0.0008)*** (0.0006)***
Dimensions Independent Loan Loan Loan
variables spreads spreads spreads
nonholdit*TCRIjt -0.1299

(0.1940)

-0.1305

(0.1884)

foreit 0.0713

(0.3369)

0.1400

(0.1963)

0.1583

(0.1439)

foreit * TCRIjt -0.0721

(0.6091)

-0.0939

(0.5052)

relation_type largestit -0.2669

(<.0001)***

-0.1479

(0.0360)**

-0.1276

(0.0734)*

largestit*TCRIjt -0.1678

(0.0406)**

-0.1861

(0.0246)**

mainit -0.1716

(<.0001)***

-0.0685

(0.2552)

-0.0559

(0.3524)

mainit * TCRIjt -0.1471

(0.0376)**

-0.1585

(0.0252)**

TRCI-state upgradejt 1.5386 (<.0001) ***
upgradejt* TCRIjt -1.6456

(<.0001)***

downgradejt -0.0670

(0.6823)

downgradejt* TCRIjt 0.0497

(0.7714)

Size1 -0.1487 -0.1475 -0.1455
firm (<.0001)*** (<.0001)*** (<.0001)***
Leverage 0.0057

(<.0001)***

0.0057

(<.0001)***

0.0057

(<.0001)***

Ros -0.0147

(<.0001)***

-0.0150

(<.0001)***

-0.0149

(<.0001)***

Size2 0.0310 0.0321 0.0308
bank (0.0345)** (0.0290)** (0.0357)**
cost_income 0.0404

(0.5022)

0.0386

(0.5241)

0.0364

(0.5471)

Adj.R2 0.0955 0.0979
F- value 81.470 68.23
Samples 12032 12032

Table 7. The impact of the customer’s credit status and relationships on loan spreads–measuring relationships by the financing ratio of different ownership types

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