Perceiving causes of credit risk in mid-market lending: evidence from India

The Indian public sector banks which are highly stressed on account of deteriorating asset quality are experiencing rising defaults in mid-market lending, causing profitability and liquidity pressures. A study has been conducted on three dimensional causes of credit risk faced by these banks in their mid-corporate loan books, borrower-specific, bank-specific, and economic slowdown, through perception of different groups of banks' 337 credit and risk managers. The paper presents the empirical evidence that there is the highest risk perception among credit and risk managers for industry and business risk in this loan segment and then of management and financial risk. The empirical investigation finds that the under-utilisation of capacity, technology risk, key input risk, integrity and competence of management, track record of past payments, loan amount and maturity, and key financial ratios are the core risk drivers in mid-corporate sector. Inadequate appraisal and assessment of credit risk by banks, and economic slow-down were also found to be causing higher delinquent loans.