Finance: Research, Policy and Anecdotes

Postcard from Mumbai

I am just coming back from Mumbai from an exciting conference on financial intermediation in emerging markets, jointly organised with Franklin Allen, Manju Puri and Co-Pierre Georg and co-sponsored by the Brevan Howard Centre at Imperial College and CAFRAL at the Reserve Bank of India.  This was the third in a series of BRICS conferences, which started with a conference in Rio de Janeiro in 2015, followed by a conference in Cape Town in 2016.  We hope for a repeat event in China, Russia or another major emerging market in the next few years.

 

India is certainly an appropriate place to host such a conference, given the rich and varied history of financial sector policies the country has gone through. As deputy governor N.S. Vishwanathan discussed in his policy keynote, there was an ongoing learning process, which resulted in policy experimentation over the decades and which has also been used as identification strategy  by researchers in research papers, such as myself in this paper (currently under revision). And there is now also exciting research work going on in CAFRAL in banking and finance.  

 

Tarun Ramadorai gave a keynote address on household finance in emerging markets and presented fascinating statistics based on detailed household surveys across different emerging markets on households’ balance sheets.  The most striking findings were that households hold much more real estate assets (rather than financial assets) in emerging markets than in advanced countries, while at the same time they have less secured (mortgage) debt. Estimates also show that shifting from such a rather inefficient balance sheet to more financialisation could bring quite a boost in income growth. Not surprisingly, Tarun’s finding match with my own work on financial sector structure in develolping countries (limited mortgage loans, focus on short-term lending) and to work showing that more efficient financial markets have an important growth benefit for developing and emerging markets. An interesting challenge that arises out of this work is for researcher to focus more on middle classes (20th to 80th percentiles of income distribution, in statistical terms) and a fuller set of financial services than we often do when focusing on the bottom of the pyramid. 

 

There was an exciting set of papers covering countries as diverse as Bolivia, China, Greece and Rwanda.  In the following I will only point to a few that looked especially interesting to me.

 

Mrinal Mishra and co-authors use the Bolivian credit registry to test the impact of the entry of new arms-length consumer lenders on credit access by costumers of relationship-focused microfinance institutions (MFIs).  They find that loans disbursed by new entrants to borrowers who switch from incumbents turn out to be riskier driven primarily by adverse selection. The incumbent MFIs, in turn, react with an “arms race”, offering better loan terms to these customers, ultimately resulting in overindebtedness.

 

Ioannis Spyridopoulos and co-author identify strategic default by mortgage borrowers in Greece, using  the introduction of a foreclosure moratorium and a new personal bankruptcy process in 2010 as identification strategy.  Specifically, borrowers that took advantage of the foreclosure moratorium but did not declare personal bankruptcy (which would have implied giving up other assets) are identified as strategic defaulters. Ioannis shows that 28% of all defaulters were strategic, contributing three percentage points to the NPL stock in Greek banks.  Strategic defaulters are more likely to be self-employed, to have higher educational levels and to work in finance or law.  What these findings show is that loan modification programmes – often an important component of crisis resolution strategies - have to be better targeted.

 

My former PhD student Andre Silva and co-authors examine the impact of a large-scale microcredit expansion program in Rwanda. Not surprisingly, a higher share of previously unbanked people gain access to credit. The more interesting part is that a large share of first-time borrowers subsequently switch from these microfinance institutions to commercial banks, which cream-skim low-risk borrowers and grant them larger, cheaper, and longer-term loans.  Powerful evidence how a credit registry including information on loans from all financial institutions can allow borrower to climb up the ladder of financial institutions.

 

Finally, Tianyue Ruan sheds light on entrusted loans in China, inter-firm loans arranged by banks. She finds that such loans are more prevalent and more profitable in cities with a tighter supply of bank loans than in other cities (due to a loan-deposit ratio cap introduced by regulators).  And it is banks with excess cash that function as lenders, suggesting that this type of lending might pose fewer financial stability risks (than if these firms raised money to on-lend).

 

What these four papers (and others in the conference) have in common is that they use unique data – either credit registry data, loan-level data from a specific bank or hand-collected data. This is clearly the future of research in finance and development – micro-data on transactions or survey-based. I am very much looking forward to the next edition of this conference… stay tuned….