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Advanced Lending Operations and Credit Risk Assessment Using Purchase Order Information

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  • Suguru Yamanaka

    (Bank of Japan)

Abstract

This paper proposes advanced lending operations and credit risk assessment using purchase order information from borrower firms. Purchase order information from a borrower firm is useful for financial institutions to evaluate the actual business conditions of the firm. This paper shows the application of purchase order information to lending operations and credit risk assessment, and reveals its effectiveness. First, we illustrate purchase order financing, which is the lending method backed by purchase order information from borrowers. With purchase order financing, firms that consistently receive purchase orders from credit-worthy firms can borrow money under more favorable lending terms than the usual lending terms based on the financial statements of the borrower firm. Second, we propose real-time credit risk monitoring of firms. Financial institutions can monitor the actual business conditions of borrower firms by evaluating the firm's asset value using purchase order information. A combination of traditional firm monitoring using financial statements and high-frequency monitoring using purchase order information enables financial institutions to assess the business conditions of borrower firms more precisely and efficiently. Then, with high-frequency data, financial institutions can give borrower firms appropriate support if necessary on a timely basis.

Suggested Citation

  • Suguru Yamanaka, 2016. "Advanced Lending Operations and Credit Risk Assessment Using Purchase Order Information," Bank of Japan Working Paper Series 16-E-19, Bank of Japan.
  • Handle: RePEc:boj:bojwps:wp16e19
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2016/data/wp16e19.pdf
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    References listed on IDEAS

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    1. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Michael Genser, 2006. "A Structural Framework for the Pricing of Corporate Securities," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-28685-1, June.
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    Cited by:

    1. Suguru Yamanaka & Misaki Kinoshita, 2018. "A structural credit risk model based on purchase order information," Bank of Japan Working Paper Series 18-E-11, Bank of Japan.

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    More about this item

    Keywords

    Purchase order; Lending operations; Credit risk;
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