Research On The Efficiency Of Commercial Banks' Loan Allocation In China

According to model banking theory,the basic function of banking is to achieve efficient allocation of capital in the economy.However,the low operating efficiency of commercial banks in China has led to inefficient allocation of capital both on the macro and the micro level.This paper studies the efficiency of commercial banks' loan allocation decisions using transaction-level data from one urban commercial bank in China.Specifically,we look at the decision of loan allocation,the relationship between distance,information asymmetry and loan application decisions,and the effect of different compensation schemes of loan officers.First,from the perspective of loan allocation,the overall efficiency of the economy depends on whether the banks can select firms with the highest productivity.The optimal allocation of credit should give priority to firms with higher productivity,not firms that are less risky.The empirical results show the opposite,i.e.bank select riskless firms instead of firms with high productivity.This finding provides micro empirical evidence for the low efficiency of capital allocation in China.Second,from the perspective of information collecting and processing,as the loan application process heavily depends on information especially soft information in the case of small and medium-sized enterprises(SMEs hereafter),this paper studies the effect of the geographical distance between firms and banks on information collecting and processing and hence the outcomes of firms' loan application.We find that bank-firm distance is mostly affected by the firm's industry,fixed asset ratio,age and size.After controlling for these factors,distance still has a significantly negative effect on the probability of application approval,especially for those new firm clients whose information asymmetry is more severe,which supports the hypothesis that distance affects information collection and transmission.From 2010 to 2015 as information technology improved,the bank did not expand its operating distance,nor did the effect of distance on application approval probability change significantly.We also find that given the approval of the application,distance does not affect the loan interest rate.Lastly,from the perspective of incentives,we study how different compensation schemes affect the decisions of loan officers.We find that branches with a higher share of their profit as compensation tend to make loans with a significantly higher amount and longer maturity,and the default ratio on these loans is also significantly lower,especially for short-term loans.Further analysis finds that the interest rate charged by these branches can better predict ex post loan default ratio,indicating better information collection and utilization by these high-incentived branches.The main contribution of this paper is to use transaction-level data to study both qualitatively and quantitatively the lending decision of commercial banks and give insights about the way that commercial banks make lending decisions.This paper provides new micro evidence on the micro and macro inefficiency of capital allocation in China.