Determinants of SME Loan Default: The Importance of Borrower-Level Heterogeneity
Using unique borrower-level balance sheet information for a cross-section of 6,000 Irish SME loans, this paper tests the determinants of default at the micro level. Typical financial ratios, such as the ratio of the loan to total assets, the current ratio, leverage ratio, liquidity ratio and profitability ratio, are found to be significant predictors of default. Further, the length of time the borrowing firm’s owner has been with the firm mitigates the likelihood of default. Conditional on the above, significant sector-level effects remain. The paper moves beyond average effects of the above-mentioned variables by repeating the analysis across seven sectors of economic activity, and across the quintiles of firm size, exposure and credit quality. The share of defaults is shown to fall as firms get larger, and to rise as loans get larger relative to assets. The results suggest that different warning signals can be identified, particularly for borrowers of different sizes and with small versus large loans. These results contribute to the literature on “fundamentals-based” modelling of corporate default risk, and represent one of very few sets of results on the determinants of default in SME lending in particular.
|Date of creation:||Sep 2012|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box No. 559, Dame Street, Dublin 2|
Phone: (01) 671 6666
Fax: (01) 671 6561
Web page: http://www.centralbank.ie
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Westgaard, Sjur & van der Wijst, Nico, 2001. "Default probabilities in a corporate bank portfolio: A logistic model approach," European Journal of Operational Research, Elsevier, vol. 135(2), pages 338-349, December.
- Jarko Fidrmuc & Christa Hainz & Anton Malesich, 2006.
"Default Rates in the Loan Market for SMEs: Evidence from Slovakia,"
William Davidson Institute Working Papers Series
wp854, William Davidson Institute at the University of Michigan.
- Fidrmuc, Jarko & Hainz, Christa, 2010. "Default rates in the loan market for SMEs: Evidence from Slovakia," Economic Systems, Elsevier, vol. 34(2), pages 133-147, June.
- Jarko Fidrmuc & Christa Hainz, 2009. "Default Rates in the Loan Market for SMEs:Evidence from Slovakia," Ifo Working Paper Series Ifo Working Paper No. 72, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
- Kelly, Robert, 2011.
"The Good, The Bad and The Impaired - A Credit Risk Model of the Irish Mortgage Market,"
Research Technical Papers
13/RT/11, Central Bank of Ireland.
- Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
- Dietsch, Michel & Petey, Joel, 2004. "Should SME exposures be treated as retail or corporate exposures? A comparative analysis of default probabilities and asset correlations in French and German SMEs," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 773-788, April.
When requesting a correction, please mention this item's handle: RePEc:cbi:wpaper:06/rt/12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fiona Farrelly)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.