FACTORS INFLUENCING CREDIT RATIONING: A … · “Factors Influencing Credit Rationing: ......
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DOI: 10.14260/jadbm/2015/18
EMPIRICAL ARTICLE
J of Advances in Business Management /eISSN-2395-7441/pISSN-2395-7328/ Vol. 1/ Issue 3/ July-Sept. 2015 Page 155
FACTORS INFLUENCING CREDIT RATIONING: A STUDY CONDUCTED IN PONDICHERRY CO-OPERATIVE URBAN BANK LIMITED V. Subramanian1, A. Ananda Kumar2
HOW TO CITE THIS ARTICLE: V. Subramanian, A. Ananda Kumar. “Factors Influencing Credit Rationing: A Study Conducted in Pondicherry Co-Operative Urban Bank Limited”. Journal of Advances in Business Management; Vol. 1, Issue 3, July-September 2015; Page: 155-168, DOI: 10.14260/jadbm/2015/18
ABSTRACT: This paper addresses credit rationing by credit officers in the banking industry the
objective of this study was to examine the factors influence credit rationing by Pondicherry Urban co-
operative banks in Pondicherry. The descriptive research design was used in the study. The target
population from which the sample was drawn is Pondicherry co-operative urban banks within the
Pondicherry region. A representative sample was drawn using the Proportionate Stratified random
sampling. Both primary and secondary data were used in the study. The data collected was validated,
edited and coded then analyzed using descriptive statistics with the aid of Statistical Package for Social
Sciences (SPSS). Data presentation methods used were tables, charts and diagrams. The study
established that the key factors that influenced credit rationing by Pondicherry co-operative urban
banks in Pondicherry are loan characteristics, firm characteristics and observable characteristics.
Some of the recommendations that the study made were that that it is beneficial for banks to ration
credit, but it should be done with professionalism and with no business, the factors that influence
rationing of credit should be evaluated thoroughly by the person in charge and given priority before
issuing credit. And the Banks should find out more about credit rationing and how it can contribute to
their business growth.
KEYWORDS: Banks, Business, Credit officers, Credit rationing.
INTRODUCTION: Credit rationing refer to the situation where lender limit the supply the addition
credit who demand for fund, even if borrowers are ready to pay higher rate of interest. A measure
employed by lending institutions to limit the availability of capital based on determinations
they make about the credit-worthiness of borrowers as well as the lending environment in general.
Raising interest rates above current market rates, regardless of the supply and demand equilibrium,
are seen as a form of credit rationing. Competition between lenders and high effort by borrowers
ensure positive outcomes for the society, so investment should take place.
If lenders collect such information from the potential borrowers themselves, borrowers are
likely to give an exaggerated view of their creditworthiness. This raises the need to validate such
information from other sources. Furthermore, if lenders try to collect such information from other
community members, there is a tendency to withhold information if the one soliciting such information
is a stranger. Should lenders increase the lending rate to compensate for the higher cost of information
gathering or the level of reliability of the information, this may result in adverse selection and moral
hazard, both forms of behaviour of borrowers which may negatively affect the lenders’ returns on
loans.
The informal lender’s assessment of the borrowers’ debt service capacity will also influence
the probability of their being credit rationed. However, the composition of the borrowers’ outstanding
debt is of significance to the informal lenders’ credit rationing behaviour. If the outstanding debt is
mainly from the formal financial sector, the informal lender may not be threatened, as he may expect
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to have a better chance of recovering his money as compared to the formal lender. In such a scenario
the potential borrower may be less credit rationed. The borrowers’ acceptance of interlinked credit
contracts also determines their likelihood of being credit rationed. An interlinked credit contract acts
as a disguised form of collateral that reduces the adverse selection and moral hazard problems and
consequently reduces the probability of default.
Access to credit does not imply that the demand for credit will be satisfied. Lenders determine
how much credit is allocated based on the probability of loan default, often resulting in credit rationing.
The probability of default may be influenced by a number of factors that include the expected returns
of the project, the terms of the loan, market imperfections and borrower characteristics.
REVIEW OF LITERATURE: Cole (1998) shows that extensive relation between the bank and the firm
leads to a higher level of credit availability. The author also analyses the role of the number of banks
and concludes to the existence of a negative relation between this one and the credit availability:
working with more banks leads to be faced with a higher level of credit rationing. Numerous empirical
studies have confirmed this impact of the customer relationship on the credit availability.
Elsas and Krahnen (1998) note that the main bank plays the role of liquidity provider in a
situation of financial crisis. In Italia, D'Auria, Foglia and Marullo Reedtz (1999) reject the hypothesis of
the hold-up problem, but find that the increase of the number of banks leads to a slight decrease of the
cost of the credit. Petersen and Rajan (1995) continue their work by studying the relation between the
profits of the customer relationship and the level of competition in the banking sector. Their empirical
study shows that the credit availability is increasing with the market power of the bank, is also
increasing with the duration of customer relationship but is diminishing with the number of banks.
Bonaccorsi and Gobbi (2001) directly address the question of the impact of bank mergers and
acquisitions on small business lending. They show that, if it is true that bank mergers seem to reduce
small business lending, this effect is mostly offset by the reactions of other banks. Sapienza (2002), on
the same topic, concludes that "When banks become larger, they reduce the supply of loans to small
borrowers". To study both the impact of bank mergers and bank entries on the supply of credit to SBF.
They conclude, for mergers, to a temporary reduction in outstanding credit to all sizes of
borrowers and, for entries, with a relatively persistent negative impact on credit supply to small and
medium sized firms.
Berger and et al. (2001), this time in the context of the relation between the number of banks
and the level of credit rationing. This result has both practical and theoretical consequences. For SBF,
best strategy to follow concerning the choice of a number of banks in order to avoid credit rationing
depends heavily on the kind of the main bank they are working with. We show in particular that when
the firm's main bank is one of the three biggest Belgian banks, the increase of the number of banks
allows limiting the risk of credit rationing.
Thakor (1996). The author analyses the relation between risky borrowers and the number of
banks in a framework characterized by adverse selection. Each borrower can simultaneously contact
several banks and each bank knows the number of banks that have been contacted by the
Borrower. On this basis, the bank will decide if it will proceed to the financial evaluation of the
borrower. This task is costly and can only imperfectly be done. Depending on its results, the bank will
(or not) give the requested credit. The financial screening task being costly, the bank must outweigh
this cost with a sufficiently high probability to be the only bank to accept the credit request.
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They conclude, for mergers, to a temporary reduction in outstanding credit to all sizes of
borrowers and, for entries, with a relatively persistent negative impact on credit supply to small and
medium sized firms.
Oluyomno (2007) defines Microfinance Banks as a globally accepted means of reaching
businesses and persons that are either not served at all or that are inadequately served by the normal
commercial banks. Karlan and Goldberg (2007) put it that microfinance is the provision of small-scale
financial services to people who lack access to traditional banking services. “Microfinance is often
defined as financial services for poor and low-income clients offered by different types of service
providers. In practice, the term is often used more narrowly to refer to loans and other services from
providers that identify themselves as microfinance institutions. More broadly, microfinance refers to a
movement that envisions a world in which low-income households have permanent access to a range
of high quality and affordable financial services offered by a range of retail providers to finance income-
producing activities, build assets, stabilize consumption, and protect against risks. These services
include savings, credit, insurance, remittances, and payments, and others.”
Crabb and Keller (2011) see microfinance as providing financial services to individuals
traditionally excluded from the banking system, especially women. Consequently Lafourcade et al.
(2005, p. 2) Put it that Microfinance is “the supply of loans, savings, money transfers, insurance, and
other financial services to low-income people” Similarly, Udeaja and Ibe (2006) defined a micro finance
institution as one that focuses on providing financial services to the low income/poor persons in the
community. Technically, micro finance is a business in which the person conducting the business holds
himself out as accepting deposits on a day to day basis and any other activity of the business which is
financed, wholly or to a material extent, by lending or extending credit for the account and at the risk
of the person accepting the deposit, including the provision of short term loans to small or micro
enterprises or low income households and characterized by the use of collateral substitutes
(GoK, 2006).
According to Munene and Guyo (2013), it is the way of supplying loans and small credits to
finance small projects to help the poor have an income through forming their own small scale business
to earn their daily bread and better their living. Micro finance is the provision of credit to the poor and
low-income earners to enable them engage in productive activities relationship-based banking for
individual entrepreneurs and small businesses; and (2) group-based models, where several
entrepreneurs come together to apply for loans and other services as a group”.
A rise in the lending rate may also create a moral hazard problem, where borrowers with low
risk projects shift to high risk projects that promise higher returns but with high probability of default.
For this reason lenders faced with information asymmetry and lack of control over actions of
borrowers tend to design credit contracts that will induce borrowers to take actions that enhance the
likelihood of repayment and also attract low risk borrowers. The lenders may therefore find it optimal
to charge lower than equilibrium interest rates and use non-price mechanisms to ration credit Hoff
and Stiglitz (1990).
The specific borrower characteristics that influence the informal lenders’ credit rationing
behaviour include strength of previous business relationships, reputation in the market, and
acceptance of interlinked credit contracts, debt-service capacity and wealth status. Aleem (1990) argue
s that informal lenders mainly use the established relationship with borrowers as a screening and
credit rationing mechanism.
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The longer the previous business relationship, the lower will be the probability of the borrower
being credit rationed. Bell (1990) further points out that because it takes long to build a relationship
with informal lenders (A minimum of one year), borrowers tend to stick to particular informal lenders
so as to avoid the long screening process and high probability of loan applications being rejected by
new lenders.
The reputation of the potential borrower is another important yardstick that influences the
informal lenders’ credit rationing behaviour Siamwalla et al. (1990). Since loans in the informal
financial sector are mainly character loans (i.e. not backed by any collateral security), he borrower’s
reputation is of significant importance to the informal lender. For this reason, informal lenders invest
both financial resources and time to gather information about potential borrowers from people known
to them both in the market place and the villages where borrowers reside. The reputation of the
borrower determines the probability of willful default, which may be assessed through how he has
performed in the repayment of loans borrowed from other people. Borrowers with poor reputations
will more likely be credit rationed.
FRAMEWORK OF CREDIT RATIONING:
CHALLENGES FACED BY CO-OPERATIVE BANKING: The co-operative bank marketing is than an
approach to market the service profitability. It is a device to maintain commercial viability. The
changing perception of bank marketing has made it a social process. The significant properties of the
holistic concept of management and marketing has made bank marketing a device to establish a
balance between the commercial and social considerations, often considered to be opposite of each
other. A collaboration of two words, banks and marketing thus focuses our attention on the following:
Bank marketing is a managerial approach to survive in a highly competitive market as well as
reliable service delivery to target customers.
It is a social process to subserve social interests.
It is a fair way of making profits.
It is an art to make possible performance-orientation.
It is a professionally tested skill to excel in competition.
Fig. 1: Credit Rationing Framework
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Users of Banking Services: The emerging trends in the level of expectation affect the formulation of
marketing mix. Innovative efforts become essential the moment it finds a change in the level of
expectations. There are two types of customers using the services of banks, such as general customers
and the industrial customers.
General Users: Persons having an account in the bank and using the banking facilities at the terms and
conditions fixed by a bank are known as general users of the banking services. Generally, they are the
users having small sized and less frequent transactions or availing very limited services of banks.
Industrial Users: The industrialists, entrepreneurs having an account in the bank and using credit
facilities and other services for their numerous operations like establishments and expansion, mergers,
acquisitions etc. of their businesses are known as industrial users. Generally, they are found a few but
large sized customers.
THE MAIN FEATURES OF CO-OPERATIVE BANKS:
Encourage Savings: Banks collect the small savings scattered in different part of the country. These
savings are used in trade and industries. Thus banks collect savings one hand and put them in
productive uses from the other.
Financing of Trade and Industry: Banks provide finance to trade and industry. Modern trade and
industry requires capital in huge quantum. Additional resources are raised from the public by banks
and these resources are used for making loans and advances to industry and trade.
Security of Loans: Co-operative Banks guarantee loans taken by industrial and business units from
national and international sources. It helps industrial and business units in getting loans from these
sources.
Personal Credit: Banks provide consumer loans to the customers on the basis of personal credit.
These loans are provided to purchase consumer goods.
Financial Assistance: Co-operative Banks provide the financial assistance to new enterprises and
through new innovations the economy gets a continuous momentum. Credit and financial facilities are
provided by these institutions.
The credit policy laid down by management as a guide for action in the determination of credit
limit, standards, terms and collection efforts has strong implications. Credit terms granted to
customers have an effect on receivables, thus increasing working capital. However, it should be
reiterated that although management sets credit terms, its final determination depends on prevailing
trading practices as well as changing economic conditions. It does not mean that the firm or company's
management cannot use their discretion to determine its credit policy in such a way that liquid funds
will always be available to meet operational needs. It is this situation that necessitated this research
work which is aimed at examining the impact of effective and efficient management of credit sales on
the profitability and liquidity positions of a bank.
Trade credit is a vital and convenient source of financing mainly for companies who could not
source funds from financial institutions. A company that fails to qualify for bank financing may receive
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trade credit if it is credit worthy. In the light of the above, the study will serve as a source of information
of companies granting credit with respect to the policies and procedures to be adopted. It will also be
relevant to students of accounting and other related courses for research purposes. The general public
will equally benefit because it will serve as a reference material when adopting any credit policy. Also
management practitioners will find the data and views expressed in this research work relevant to
their day to day business decisions especially in the manufacturing industries.
REASONS FOR GRANTING CREDIT:
Companies in the Food and Beverage Sector in Nigeria Feel the Necessity of Granting Credit for
Several Reasons. They include:
Competition: Generally the higher the degree of competition, the more the credit granted by a
firm.
Company's Bargaining Power: If a company has a higher bargaining power vis-a-vis its buyers,
it may grant no or less credit.
Marketing Tool: Credit is used as a marketing tool, particularly when a new product is launched
or which a company wants to push its weak product.
Buyers Requirements: In a number of business sectors buyers/dealers are "not able to operate
without extending credit. This is particularly so in the case of industrial products.
Buyers Status: Large buyers demand easy credit terms because of bulk purchases and higher
bargaining power. Some companies follow a policy of not giving much credit to small retailers
since it is quite difficult to collect dues from them.
Relationship with Dealers: companies sometimes extend credit to dealers to build long-term
relationship with them or to reward them for their loyalty. Efficient credit sales management is
necessary for achieving liquidity and profitability of a company.
Hypotheses of the Study: The study will test the hypothesis that credit rationing behaviour of banks
is negative and significantly influenced by the collateral offered for the loan, business earnings and
business experience.
Statement of the Problem: In Pondicherry it has been dominated by co-operatives, which are the
major suppliers of credit to households and co-operative businesses. To enhance the efficiency of
accessibility to funds and to improve access to a wider variety of services in the formal credit markets,
the Pondicherry government implemented a number of financial sector reforms which included
licensing of additional branch banks and other financial institutions, review of the Banking Act to widen
the definition of banking beyond the co-operative banks and removal of restrictive licensing policies
and reducing the role of government in the financial sector.
OBJECTIVES OF THE STUDY:
1. To investigate the factors influencing credit rationing towards loan borrowers of Pondicherry
co-operative urban bank limited.
2. To determine how firm characteristics influence credit rationing by Pondicherry co-operative
urban bank limited.
3. To find out how observable characteristics which influence for loan sanctioning by credit officers
of Pondicherry co-operative urban bank limited.
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Scope of the Study: The present study aims at studying the credit lending performance of the
Pondicherry Cooperative urban Bank Limited. The outcome of the study would suggest the factors that
are responsible for the good performance of credit officers formed by Pondicherry Cooperative urban
Bank Limited. Further the study would highlight the role and importance of Pondicherry Cooperative
urban Bank Limited. To examine how the bank has worked out problem loans, including rescheduling
and restructuring so as to enhance its performance.
RESEARCH METHODOLOGY: Research Methodology to the various sequences, steps to be adopted by
a researcher to study a problem with certain objective in view. This research paper is purely related of
descriptive research. The main goal of this type of research is to describe the data and characteristics
about what is being studied. The idea behind this type of research is to study frequencies, averages,
and other statistical calculations. Although this research is highly accurate, it does not gather the causes
behind a situation. Descriptive research is mainly done when a researcher wants to gain a better
understanding of a topic. It is quantitative and uses surveys and panels and also the use of probability
sampling.
During the survey, it is important to note the interaction between researchers and participants
in a particular context or setting. With the importance of the setting in mind, the researcher personally
contact each employee of the organization. The researcher was careful to ensure that the interview
place was comfortable, temperate and quiet, and located at a sufficient distance from other employees
to ensure privacy. Because the validity and success of the research depended on the participants being
at ease with the research process, the researcher introduced himself in a warm and friendly manner,
detailed the context of the interview and emphasized its purpose.
Here the researcher makes it consists 240 customers as a sample size to analyze the factors
influencing credit rationing. The selected respondents represented a balanced mix of various
demographic factors (Age, gender, educational levels, and income groups). Simple Random sampling
was used for the purpose of the survey, and a research sample was taken to know the factors influence
of credit rationing in the study.
The questionnaire for the research was divided into two parts: the first part deals with the
demographic data of the respondents and the second part of the questionnaire with 42 statements was
used. These statements are measured through the five point Likert’s five-point scale were the
respondents had to fill one choice ranging from strongly disagree to strongly agree. The questionnaire
is prepared for the respondents have been pre-tested by the researchers’ in person. Comments on the
question were noted and after careful analysis necessary modification has been made in the
questionnaire. Pre-testing was conducted on 10 respondents. The researchers identified three
respondents each departments randomly at S.K. Leather Industry in the study region. In the course of
the time, the researcher had experienced some difficulties in getting answers to some of the questions
raised and suitable changes have been incorporated before finalizing the well-structured
questionnaire.
ANALYSIS AND INTERPRETATION:
Analysis of Factors: The purpose of this investigation was to explore the factor structure underlying
the mangers responses on factors influencing credit rationing. A successful result is one in which a few
factors can explain a large portion of the total variance and those factors can be given a meaningful
name using the assortment of items that correlate the highest with it. In the context of this study, when
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such success is attained, we may say that we have valid evidence supporting the conclusion that the
scores from this instrument are a valid assessment of factors influencing credit rationing. We can feel
confident when adding similar items up for total scores to represent the different dimensions of credit
rationing (Each factor represents a dimension). This kind of validity evidence is called internal
structure evidence because it suggests that items line up in a predictable manner, according to what
thematically ties them together conceptually.
Component
Initial
Eigenvalues
Rotation Sums of
Squared Loadings
Total % of
Variance
Cumulative
% Total
% of
Variance
Cumulative
%
1 4.236 22.292 22.292 2.916 15.346 15.346
2 3.612 19.010 41.302 2.814 14.809 30.155
3 2.902 15.273 56.576 2.618 13.779 43.934
4 2.081 10.954 67.530 2.594 13.652 57.586
5 1.626 8.557 76.087 2.144 11.282 68.869
6 1.263 6.650 82.736 1.689 8.889 77.758
7 1.076 5.666 88.402 1.518 7.992 85.749
8 .657 3.458 91.860 1.161 6.111 91.860
9 .565 2.975 94.835
10 .350 1.842 96.678
11 .343 1.803 98.481
12 .113 .595 99.076
13 .095 .498 99.575
14 .066 .348 99.923
15 .015 .077 100.000
16 6.652e-16 3.501e-15 100.000
17 3.872e-16 2.038e-15 100.000
18 8.506e-17 4.477e-16 100.000
19 -1.649e-16 -8.681e-16 100.000
Table 1: Initial Eigenvalues
The above table gives eigenvalues, the variance explained, and cumulative variance explained
for the factor solution. The first panel gives values based on initial eigenvalues. For the initial solution,
there are as many factors as there are variables. The "Total" column gives the amount of variance in
the observed variables accounted for by each factor. The "% of Variance" column gives the percent of
variance accounted for by each specific factor, relative to the total variance in all the variables. The
"Cumulative %" column gives the percent of variance accounted for by all factors up to and including
the current one. For instance the Cumulative % for the second factor is the sum of the % of Variance
for the first and second factors. In the above table, there are a few factors that explain a lot of the
variance which is a sign of good factor analysis and the rest of the factors explain relatively small
amounts of variance.
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In the "Rotation Sums of Squared Loadings" group, the variance accounted for by rotated factors
or components may be different from those reported for the extraction, but the Cumulative % for the
set of factors or components will always be the same. Together they are capable of explaining roughly
91.86% of all the variable variances.
Particulars
Component
1 2 3 4 5 6 7 8
Repayment .843
Negotiating .843
Guarantees .561 -.430
History -.934
Action -.934
Analysis .622 .410
Report -.574 .496
Documentation .544
Information .488 .503 -.478
Reputation -.492 .755
Clients -.492 .755
Committee -.588 -.722
Control -.588 -.722
Forcing .672
Period .497 -.435 -.545
Problem .468 -.501 -.434
Premium -.740
Collateral -.606
Fund -.525 -.430 .582
Table 2: Component Determination
From the 19 factors only 7 factors are having value more than 1. This means that these 7
statements can be used to explain maximum variance in the characteristics of people. The total
variance accounted by all the eight factors is 91.860 percent. This means that significant amount of
variance is explained by the reduced eight factors alone. Therefore it is better to take eight variables
alone for further analysis.
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Component Matrix
Component
Particulars 1 2 3 4 5 6 7 8
Repayment .843
Negotiating .843
Guarantees .561 -.430
History -.934
Action -.934
Analysis .622 .410
Report -.574 .496
Documentation .544
Information .488 .503 -.478
Reputation -.492 .755
Clients -.492 .755
Control -.588 -.722
Committee -.588 -.722
Forcing .672
Period .497 -.435 -.545
Problem .468 -.501 -.434
Premium -.740
Collateral -.606
Fund -.525 -.430 .582
Figure 3: Component Matrix Determination
Nineteen questions relating to factors influencing credit rationing were factor analyzed using
principal component analysis with Varimax with Kaiser Normalization rotation. These eight factors in
combination account for 91.860% of the total variance. We can also priorities the factors based on the
percentage of variance of each factor.
The first factors were labeled as credit history of the borrowers is which accounts for 22.29%
of the common variance. There are three items loading on this factor. The Second factor derived was
labeled action taken for non-repayment which accounts for 41.30% for the common variance. The third
factor was labeled that report required by officials which accounts for 56.57% of the common variance.
The fourth factor was labeled as negotiating with the bank which accounts for 67.53% of the common
variance. The fifth factors were labeled as repayment of the loan which accounts for 76.80% of the
common variance.
The sixth factors were labeled as analysis for credit analysis which accounts for 82.73% of the
common variance was labeled Achievement at given times. The seventh factors were labeled as
reputation of the client which accounts for 88.40% of the common variance. The eight factors were
labeled as client awareness about credit system which account for 91.86% of the common variance.
Chi-Square Test: Chi-square which is available in cross tab is used to test whether there is a significant
association between two variables. The two variables that are to be applied in chi-square analysis must
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be of type category. The total number of observation used in this test must be large i.e.,
n>=30.Independence - The observations are always assumed to be independent of each other. This
means chi-square cannot be used to test correlated data (like: matched pairs, panel data). It is
frequency based test.
CHI-AQUARE TEST
INCOME * TAKEN
CROSSTABULATION
Source
Particulars
Times of Loan Taken
Total Once Twice
Three
times
Four
times
More than
four times
Income
Less than 1, 20, 000 p.a 77 0 0 0 0 77
1, 20, 001-2, 00, 000 p.a 0 66 0 0 0 66
2, 00, 001-2, 80, 000 p.a 0 0 34 0 0 34
2, 80, 001-3, 60, 000 p.a 0 0 0 22 0 22
Above 3, 60, 000 p.a 0 0 0 0 41 41
Total 77 66 34 22 41 240
From the table it is found that the alternative hypothesis H1 is accepted since the significance
value is less than 0.05. This means that the customer’s income is the reason for the number of time loan
taken from the bank. And it gives a result as there is significance between income and number of time
loan taken from the bank.
Suggestion and Recommendation: The Pondicherry co-operative urban bank limited may appoint
such officials who go to the customer’s areas and make them aware about the policies of the banks in
their own languages. This will make the customers directly interacted with the bank & its policies. The
procedure of sanction of loan should be easy i.e. the number of documents required for it should be as
less as possible.
The Banks can have to launch the campaign for the awareness of bank polices in the all major
areas of the city. Additional credit union can be set up in the localities. The training for transaction with
the ATM or KCC card should be provided to customers of the bank. The bank should have to launch the
awareness programme to make customers aware about the guide lines and polices of the bank.
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CONCLUSION: From the study it is clear that Pondicherry co-operative urban bank limited has good
reputation from among other banks. All the customers from the bank are satisfied with the level of
service provided by the bank. If they follow the same policy and procedure they can have more number
of depositors to the bank and also they can retain them for a long period of time.
Since the study is deal with factors influencing credit rationing by Pondicherry co-operative
urban bank limited the major problem is found that the credit officers are taking more time to approve
the loan to the clients if they concentrate on this problem there will be more clients will approach the
bank in future period. So that majority of the population from the Pondicherry can get financial
assistant from the Pondicherry co-operative urban bank limited.
The purpose of this study was to establish the factors that influence credit rationing in co-
operative bank. The study sought to achieve the following objectives: The first objective was to
determine how firm characteristics influences credit rationing. The findings indicated that most banks
considered the level of debt in the borrower’s capital structure if the borrower’s level of debt is high
then the bank rations credit to such borrowers. This indicates that it is an important factor the bank
considers. The second objective was to investigate the factors influencing credit rationing towards loan
borrowers of Pondicherry co-operative urban bank limited. The findings indicated that most banks
rationed credit in order to reduce risk and to avoid risk of adverse selection and moral hazard and
limited technical capacity to monitor higher credit activity.
This indicates that the cost of borrowing has an important effect on the decisions of rationing
by the commercial banks. The third objective was to find out how observable characteristics which
influence for loan sanctioning by credit officers of Pondicherry co-operative urban bank limited. The
findings revealed that majority of the banks rationed credit because of information asymmetry
majority of the respondents indicated that lack of reliable information on credit worthiness of the
borrower, unfamiliarity with local economy and business environment and high cost of obtaining
information made the banks to ration credit.
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AUTHORS:
1. V. Subramanian
2. A. Ananda Kumar
PARTICULARS OF CONTRIBUTORS:
1. Assistant Professor (Senior Grade),
Department of Management Studies,
Christ College of Engineering &
Technology.
2. Professor, Department of Management
Studies, Christ College of Engineering &
Technology.
NAME ADDRESS EMAIL ID OF THE
CORRESPONDING AUTHOR:
Dr. A. Ananda Kumar,
No. 64, 2nd Floor,
Splendor Apartment,
Opp. to G. H.,
Ambour Salai, Puducherry-01
E-mail: [email protected]
Date of Submission: 23/07/2015.
Date of Peer Review: 24/07/2015.
Date of Acceptance: 26/07/2015.
Date of Publishing: 05/08/2015.