What Drives the Default Risk of Restructured Loans

Based on a large micro data set of loan accounts consisting of restructured and non-restructured loans we investigate the ability of loan-specific and macroeconomic covariates to predict the probability of default (PD). We seek to investigate whether differences in the PD between the two categories of loans can be attributed to moral hazard effects. We provide clear cut evidence that the PD of consumer loans and expected default rates are higher for the restructured than the non-restructured loans. We show that loan-specific covariates, reflecting behavioral attitudes of borrowers in consumer loan markets, constitute relatively more important determinants of the PD changes than the macroeconomic covariates. This result is more striking for the restructured loans. We find that the ratio of delinquent amount of a loan over its total balance constitutes the most influential factor of the PD. This result is more intense on the restructured loans category. We argue that the latter can be mostly attributed to moral hazard incentives of borrowers. On the other hand, we show that the ratio of a loan’s payments to the personal income of its obligor can signal reductions in the PD. We argue that this ratio signals the commitment of borrowers without moral hazard incentives to service their debt.