Friday, 7 September 2018

3 Gujarat River Gk Material PDF

Guarantees influence the screening and monitoring activities of banks. Given the role ofbanks as information providers, different results are found in the economic literature on the impactof collateral and personal guarantees on bank’s screening and monitoring activities. According tothe “lazy bank hypothesis” (Manove, Padilla, and Pagano, 2001), the presence of a high level ofguarantees weakens the bank’s incentive to evaluate the profitability of a planned investmentproject. In this case guarantees and screening are substitutes for bank’s monitoring, butthey are notequivalent from a social standpoint. Indeed, the authors find that putting an upper bound on theamount of guarantees relative to the project value is efficient in competitive credit markets. Rajanand Winton (1995), on the other hand, argue that a high level of collateralization might beconsidered as a sign that the borrower is not sound, given that the bank usually has a greaterincentive to ask for guarantees when the borrowers prospects are poor.Therefore, the monitoringactivity should be higher in the presence of higher debt securitization. Longhofer andSantos (2000)argue that guarantees and monitoring are complements when banks take senior positions on theirsmall business loans.Collateral and personal guarantees requirements might be affected by credit marketcompetition.

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