FACTORS INFLUENCING CREDIT RATIONING: A … · “Factors Influencing Credit Rationing: ......

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J of Advances in Business Management /eISSN-2395-7441/pISSN-2395-7328/ Vol. 1/ Issue 3/ July-Sept. 2015 Page 155

FACTORS INFLUENCING CREDIT RATIONING: A STUDY CONDUCTED IN PONDICHERRY CO-OPERATIVE URBAN BANK LIMITED V. Subramanian1, A. Ananda Kumar2

HOW TO CITE THIS ARTICLE: V. Subramanian, A. Ananda Kumar. “Factors Influencing Credit Rationing: A Study Conducted in Pondicherry Co-Operative Urban Bank Limited”. Journal of Advances in Business Management; Vol. 1, Issue 3, July-September 2015; Page: 155-168, DOI: 10.14260/jadbm/2015/18

ABSTRACT: This paper addresses credit rationing by credit officers in the banking industry the

objective of this study was to examine the factors influence credit rationing by Pondicherry Urban co-

operative banks in Pondicherry. The descriptive research design was used in the study. The target

population from which the sample was drawn is Pondicherry co-operative urban banks within the

Pondicherry region. A representative sample was drawn using the Proportionate Stratified random

sampling. Both primary and secondary data were used in the study. The data collected was validated,

edited and coded then analyzed using descriptive statistics with the aid of Statistical Package for Social

Sciences (SPSS). Data presentation methods used were tables, charts and diagrams. The study

established that the key factors that influenced credit rationing by Pondicherry co-operative urban

banks in Pondicherry are loan characteristics, firm characteristics and observable characteristics.

Some of the recommendations that the study made were that that it is beneficial for banks to ration

credit, but it should be done with professionalism and with no business, the factors that influence

rationing of credit should be evaluated thoroughly by the person in charge and given priority before

issuing credit. And the Banks should find out more about credit rationing and how it can contribute to

their business growth.

KEYWORDS: Banks, Business, Credit officers, Credit rationing.

INTRODUCTION: Credit rationing refer to the situation where lender limit the supply the addition

credit who demand for fund, even if borrowers are ready to pay higher rate of interest. A measure

employed by lending institutions to limit the availability of capital based on determinations

they make about the credit-worthiness of borrowers as well as the lending environment in general.

Raising interest rates above current market rates, regardless of the supply and demand equilibrium,

are seen as a form of credit rationing. Competition between lenders and high effort by borrowers

ensure positive outcomes for the society, so investment should take place.

If lenders collect such information from the potential borrowers themselves, borrowers are

likely to give an exaggerated view of their creditworthiness. This raises the need to validate such

information from other sources. Furthermore, if lenders try to collect such information from other

community members, there is a tendency to withhold information if the one soliciting such information

is a stranger. Should lenders increase the lending rate to compensate for the higher cost of information

gathering or the level of reliability of the information, this may result in adverse selection and moral

hazard, both forms of behaviour of borrowers which may negatively affect the lenders’ returns on

loans.

The informal lender’s assessment of the borrowers’ debt service capacity will also influence

the probability of their being credit rationed. However, the composition of the borrowers’ outstanding

debt is of significance to the informal lenders’ credit rationing behaviour. If the outstanding debt is

mainly from the formal financial sector, the informal lender may not be threatened, as he may expect

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to have a better chance of recovering his money as compared to the formal lender. In such a scenario

the potential borrower may be less credit rationed. The borrowers’ acceptance of interlinked credit

contracts also determines their likelihood of being credit rationed. An interlinked credit contract acts

as a disguised form of collateral that reduces the adverse selection and moral hazard problems and

consequently reduces the probability of default.

Access to credit does not imply that the demand for credit will be satisfied. Lenders determine

how much credit is allocated based on the probability of loan default, often resulting in credit rationing.

The probability of default may be influenced by a number of factors that include the expected returns

of the project, the terms of the loan, market imperfections and borrower characteristics.

REVIEW OF LITERATURE: Cole (1998) shows that extensive relation between the bank and the firm

leads to a higher level of credit availability. The author also analyses the role of the number of banks

and concludes to the existence of a negative relation between this one and the credit availability:

working with more banks leads to be faced with a higher level of credit rationing. Numerous empirical

studies have confirmed this impact of the customer relationship on the credit availability.

Elsas and Krahnen (1998) note that the main bank plays the role of liquidity provider in a

situation of financial crisis. In Italia, D'Auria, Foglia and Marullo Reedtz (1999) reject the hypothesis of

the hold-up problem, but find that the increase of the number of banks leads to a slight decrease of the

cost of the credit. Petersen and Rajan (1995) continue their work by studying the relation between the

profits of the customer relationship and the level of competition in the banking sector. Their empirical

study shows that the credit availability is increasing with the market power of the bank, is also

increasing with the duration of customer relationship but is diminishing with the number of banks.

Bonaccorsi and Gobbi (2001) directly address the question of the impact of bank mergers and

acquisitions on small business lending. They show that, if it is true that bank mergers seem to reduce

small business lending, this effect is mostly offset by the reactions of other banks. Sapienza (2002), on

the same topic, concludes that "When banks become larger, they reduce the supply of loans to small

borrowers". To study both the impact of bank mergers and bank entries on the supply of credit to SBF.

They conclude, for mergers, to a temporary reduction in outstanding credit to all sizes of

borrowers and, for entries, with a relatively persistent negative impact on credit supply to small and

medium sized firms.

Berger and et al. (2001), this time in the context of the relation between the number of banks

and the level of credit rationing. This result has both practical and theoretical consequences. For SBF,

best strategy to follow concerning the choice of a number of banks in order to avoid credit rationing

depends heavily on the kind of the main bank they are working with. We show in particular that when

the firm's main bank is one of the three biggest Belgian banks, the increase of the number of banks

allows limiting the risk of credit rationing.

Thakor (1996). The author analyses the relation between risky borrowers and the number of

banks in a framework characterized by adverse selection. Each borrower can simultaneously contact

several banks and each bank knows the number of banks that have been contacted by the

Borrower. On this basis, the bank will decide if it will proceed to the financial evaluation of the

borrower. This task is costly and can only imperfectly be done. Depending on its results, the bank will

(or not) give the requested credit. The financial screening task being costly, the bank must outweigh

this cost with a sufficiently high probability to be the only bank to accept the credit request.

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They conclude, for mergers, to a temporary reduction in outstanding credit to all sizes of

borrowers and, for entries, with a relatively persistent negative impact on credit supply to small and

medium sized firms.

Oluyomno (2007) defines Microfinance Banks as a globally accepted means of reaching

businesses and persons that are either not served at all or that are inadequately served by the normal

commercial banks. Karlan and Goldberg (2007) put it that microfinance is the provision of small-scale

financial services to people who lack access to traditional banking services. “Microfinance is often

defined as financial services for poor and low-income clients offered by different types of service

providers. In practice, the term is often used more narrowly to refer to loans and other services from

providers that identify themselves as microfinance institutions. More broadly, microfinance refers to a

movement that envisions a world in which low-income households have permanent access to a range

of high quality and affordable financial services offered by a range of retail providers to finance income-

producing activities, build assets, stabilize consumption, and protect against risks. These services

include savings, credit, insurance, remittances, and payments, and others.”

Crabb and Keller (2011) see microfinance as providing financial services to individuals

traditionally excluded from the banking system, especially women. Consequently Lafourcade et al.

(2005, p. 2) Put it that Microfinance is “the supply of loans, savings, money transfers, insurance, and

other financial services to low-income people” Similarly, Udeaja and Ibe (2006) defined a micro finance

institution as one that focuses on providing financial services to the low income/poor persons in the

community. Technically, micro finance is a business in which the person conducting the business holds

himself out as accepting deposits on a day to day basis and any other activity of the business which is

financed, wholly or to a material extent, by lending or extending credit for the account and at the risk

of the person accepting the deposit, including the provision of short term loans to small or micro

enterprises or low income households and characterized by the use of collateral substitutes

(GoK, 2006).

According to Munene and Guyo (2013), it is the way of supplying loans and small credits to

finance small projects to help the poor have an income through forming their own small scale business

to earn their daily bread and better their living. Micro finance is the provision of credit to the poor and

low-income earners to enable them engage in productive activities relationship-based banking for

individual entrepreneurs and small businesses; and (2) group-based models, where several

entrepreneurs come together to apply for loans and other services as a group”.

A rise in the lending rate may also create a moral hazard problem, where borrowers with low

risk projects shift to high risk projects that promise higher returns but with high probability of default.

For this reason lenders faced with information asymmetry and lack of control over actions of

borrowers tend to design credit contracts that will induce borrowers to take actions that enhance the

likelihood of repayment and also attract low risk borrowers. The lenders may therefore find it optimal

to charge lower than equilibrium interest rates and use non-price mechanisms to ration credit Hoff

and Stiglitz (1990).

The specific borrower characteristics that influence the informal lenders’ credit rationing

behaviour include strength of previous business relationships, reputation in the market, and

acceptance of interlinked credit contracts, debt-service capacity and wealth status. Aleem (1990) argue

s that informal lenders mainly use the established relationship with borrowers as a screening and

credit rationing mechanism.

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The longer the previous business relationship, the lower will be the probability of the borrower

being credit rationed. Bell (1990) further points out that because it takes long to build a relationship

with informal lenders (A minimum of one year), borrowers tend to stick to particular informal lenders

so as to avoid the long screening process and high probability of loan applications being rejected by

new lenders.

The reputation of the potential borrower is another important yardstick that influences the

informal lenders’ credit rationing behaviour Siamwalla et al. (1990). Since loans in the informal

financial sector are mainly character loans (i.e. not backed by any collateral security), he borrower’s

reputation is of significant importance to the informal lender. For this reason, informal lenders invest

both financial resources and time to gather information about potential borrowers from people known

to them both in the market place and the villages where borrowers reside. The reputation of the

borrower determines the probability of willful default, which may be assessed through how he has

performed in the repayment of loans borrowed from other people. Borrowers with poor reputations

will more likely be credit rationed.

FRAMEWORK OF CREDIT RATIONING:

CHALLENGES FACED BY CO-OPERATIVE BANKING: The co-operative bank marketing is than an

approach to market the service profitability. It is a device to maintain commercial viability. The

changing perception of bank marketing has made it a social process. The significant properties of the

holistic concept of management and marketing has made bank marketing a device to establish a

balance between the commercial and social considerations, often considered to be opposite of each

other. A collaboration of two words, banks and marketing thus focuses our attention on the following:

Bank marketing is a managerial approach to survive in a highly competitive market as well as

reliable service delivery to target customers.

It is a social process to subserve social interests.

It is a fair way of making profits.

It is an art to make possible performance-orientation.

It is a professionally tested skill to excel in competition.

Fig. 1: Credit Rationing Framework

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Users of Banking Services: The emerging trends in the level of expectation affect the formulation of

marketing mix. Innovative efforts become essential the moment it finds a change in the level of

expectations. There are two types of customers using the services of banks, such as general customers

and the industrial customers.

General Users: Persons having an account in the bank and using the banking facilities at the terms and

conditions fixed by a bank are known as general users of the banking services. Generally, they are the

users having small sized and less frequent transactions or availing very limited services of banks.

Industrial Users: The industrialists, entrepreneurs having an account in the bank and using credit

facilities and other services for their numerous operations like establishments and expansion, mergers,

acquisitions etc. of their businesses are known as industrial users. Generally, they are found a few but

large sized customers.

THE MAIN FEATURES OF CO-OPERATIVE BANKS:

Encourage Savings: Banks collect the small savings scattered in different part of the country. These

savings are used in trade and industries. Thus banks collect savings one hand and put them in

productive uses from the other.

Financing of Trade and Industry: Banks provide finance to trade and industry. Modern trade and

industry requires capital in huge quantum. Additional resources are raised from the public by banks

and these resources are used for making loans and advances to industry and trade.

Security of Loans: Co-operative Banks guarantee loans taken by industrial and business units from

national and international sources. It helps industrial and business units in getting loans from these

sources.

Personal Credit: Banks provide consumer loans to the customers on the basis of personal credit.

These loans are provided to purchase consumer goods.

Financial Assistance: Co-operative Banks provide the financial assistance to new enterprises and

through new innovations the economy gets a continuous momentum. Credit and financial facilities are

provided by these institutions.

The credit policy laid down by management as a guide for action in the determination of credit

limit, standards, terms and collection efforts has strong implications. Credit terms granted to

customers have an effect on receivables, thus increasing working capital. However, it should be

reiterated that although management sets credit terms, its final determination depends on prevailing

trading practices as well as changing economic conditions. It does not mean that the firm or company's

management cannot use their discretion to determine its credit policy in such a way that liquid funds

will always be available to meet operational needs. It is this situation that necessitated this research

work which is aimed at examining the impact of effective and efficient management of credit sales on

the profitability and liquidity positions of a bank.

Trade credit is a vital and convenient source of financing mainly for companies who could not

source funds from financial institutions. A company that fails to qualify for bank financing may receive

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trade credit if it is credit worthy. In the light of the above, the study will serve as a source of information

of companies granting credit with respect to the policies and procedures to be adopted. It will also be

relevant to students of accounting and other related courses for research purposes. The general public

will equally benefit because it will serve as a reference material when adopting any credit policy. Also

management practitioners will find the data and views expressed in this research work relevant to

their day to day business decisions especially in the manufacturing industries.

REASONS FOR GRANTING CREDIT:

Companies in the Food and Beverage Sector in Nigeria Feel the Necessity of Granting Credit for

Several Reasons. They include:

Competition: Generally the higher the degree of competition, the more the credit granted by a

firm.

Company's Bargaining Power: If a company has a higher bargaining power vis-a-vis its buyers,

it may grant no or less credit.

Marketing Tool: Credit is used as a marketing tool, particularly when a new product is launched

or which a company wants to push its weak product.

Buyers Requirements: In a number of business sectors buyers/dealers are "not able to operate

without extending credit. This is particularly so in the case of industrial products.

Buyers Status: Large buyers demand easy credit terms because of bulk purchases and higher

bargaining power. Some companies follow a policy of not giving much credit to small retailers

since it is quite difficult to collect dues from them.

Relationship with Dealers: companies sometimes extend credit to dealers to build long-term

relationship with them or to reward them for their loyalty. Efficient credit sales management is

necessary for achieving liquidity and profitability of a company.

Hypotheses of the Study: The study will test the hypothesis that credit rationing behaviour of banks

is negative and significantly influenced by the collateral offered for the loan, business earnings and

business experience.

Statement of the Problem: In Pondicherry it has been dominated by co-operatives, which are the

major suppliers of credit to households and co-operative businesses. To enhance the efficiency of

accessibility to funds and to improve access to a wider variety of services in the formal credit markets,

the Pondicherry government implemented a number of financial sector reforms which included

licensing of additional branch banks and other financial institutions, review of the Banking Act to widen

the definition of banking beyond the co-operative banks and removal of restrictive licensing policies

and reducing the role of government in the financial sector.

OBJECTIVES OF THE STUDY:

1. To investigate the factors influencing credit rationing towards loan borrowers of Pondicherry

co-operative urban bank limited.

2. To determine how firm characteristics influence credit rationing by Pondicherry co-operative

urban bank limited.

3. To find out how observable characteristics which influence for loan sanctioning by credit officers

of Pondicherry co-operative urban bank limited.

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Scope of the Study: The present study aims at studying the credit lending performance of the

Pondicherry Cooperative urban Bank Limited. The outcome of the study would suggest the factors that

are responsible for the good performance of credit officers formed by Pondicherry Cooperative urban

Bank Limited. Further the study would highlight the role and importance of Pondicherry Cooperative

urban Bank Limited. To examine how the bank has worked out problem loans, including rescheduling

and restructuring so as to enhance its performance.

RESEARCH METHODOLOGY: Research Methodology to the various sequences, steps to be adopted by

a researcher to study a problem with certain objective in view. This research paper is purely related of

descriptive research. The main goal of this type of research is to describe the data and characteristics

about what is being studied. The idea behind this type of research is to study frequencies, averages,

and other statistical calculations. Although this research is highly accurate, it does not gather the causes

behind a situation. Descriptive research is mainly done when a researcher wants to gain a better

understanding of a topic. It is quantitative and uses surveys and panels and also the use of probability

sampling.

During the survey, it is important to note the interaction between researchers and participants

in a particular context or setting. With the importance of the setting in mind, the researcher personally

contact each employee of the organization. The researcher was careful to ensure that the interview

place was comfortable, temperate and quiet, and located at a sufficient distance from other employees

to ensure privacy. Because the validity and success of the research depended on the participants being

at ease with the research process, the researcher introduced himself in a warm and friendly manner,

detailed the context of the interview and emphasized its purpose.

Here the researcher makes it consists 240 customers as a sample size to analyze the factors

influencing credit rationing. The selected respondents represented a balanced mix of various

demographic factors (Age, gender, educational levels, and income groups). Simple Random sampling

was used for the purpose of the survey, and a research sample was taken to know the factors influence

of credit rationing in the study.

The questionnaire for the research was divided into two parts: the first part deals with the

demographic data of the respondents and the second part of the questionnaire with 42 statements was

used. These statements are measured through the five point Likert’s five-point scale were the

respondents had to fill one choice ranging from strongly disagree to strongly agree. The questionnaire

is prepared for the respondents have been pre-tested by the researchers’ in person. Comments on the

question were noted and after careful analysis necessary modification has been made in the

questionnaire. Pre-testing was conducted on 10 respondents. The researchers identified three

respondents each departments randomly at S.K. Leather Industry in the study region. In the course of

the time, the researcher had experienced some difficulties in getting answers to some of the questions

raised and suitable changes have been incorporated before finalizing the well-structured

questionnaire.

ANALYSIS AND INTERPRETATION:

Analysis of Factors: The purpose of this investigation was to explore the factor structure underlying

the mangers responses on factors influencing credit rationing. A successful result is one in which a few

factors can explain a large portion of the total variance and those factors can be given a meaningful

name using the assortment of items that correlate the highest with it. In the context of this study, when

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such success is attained, we may say that we have valid evidence supporting the conclusion that the

scores from this instrument are a valid assessment of factors influencing credit rationing. We can feel

confident when adding similar items up for total scores to represent the different dimensions of credit

rationing (Each factor represents a dimension). This kind of validity evidence is called internal

structure evidence because it suggests that items line up in a predictable manner, according to what

thematically ties them together conceptually.

Component

Initial

Eigenvalues

Rotation Sums of

Squared Loadings

Total % of

Variance

Cumulative

% Total

% of

Variance

Cumulative

%

1 4.236 22.292 22.292 2.916 15.346 15.346

2 3.612 19.010 41.302 2.814 14.809 30.155

3 2.902 15.273 56.576 2.618 13.779 43.934

4 2.081 10.954 67.530 2.594 13.652 57.586

5 1.626 8.557 76.087 2.144 11.282 68.869

6 1.263 6.650 82.736 1.689 8.889 77.758

7 1.076 5.666 88.402 1.518 7.992 85.749

8 .657 3.458 91.860 1.161 6.111 91.860

9 .565 2.975 94.835

10 .350 1.842 96.678

11 .343 1.803 98.481

12 .113 .595 99.076

13 .095 .498 99.575

14 .066 .348 99.923

15 .015 .077 100.000

16 6.652e-16 3.501e-15 100.000

17 3.872e-16 2.038e-15 100.000

18 8.506e-17 4.477e-16 100.000

19 -1.649e-16 -8.681e-16 100.000

Table 1: Initial Eigenvalues

The above table gives eigenvalues, the variance explained, and cumulative variance explained

for the factor solution. The first panel gives values based on initial eigenvalues. For the initial solution,

there are as many factors as there are variables. The "Total" column gives the amount of variance in

the observed variables accounted for by each factor. The "% of Variance" column gives the percent of

variance accounted for by each specific factor, relative to the total variance in all the variables. The

"Cumulative %" column gives the percent of variance accounted for by all factors up to and including

the current one. For instance the Cumulative % for the second factor is the sum of the % of Variance

for the first and second factors. In the above table, there are a few factors that explain a lot of the

variance which is a sign of good factor analysis and the rest of the factors explain relatively small

amounts of variance.

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In the "Rotation Sums of Squared Loadings" group, the variance accounted for by rotated factors

or components may be different from those reported for the extraction, but the Cumulative % for the

set of factors or components will always be the same. Together they are capable of explaining roughly

91.86% of all the variable variances.

Particulars

Component

1 2 3 4 5 6 7 8

Repayment .843

Negotiating .843

Guarantees .561 -.430

History -.934

Action -.934

Analysis .622 .410

Report -.574 .496

Documentation .544

Information .488 .503 -.478

Reputation -.492 .755

Clients -.492 .755

Committee -.588 -.722

Control -.588 -.722

Forcing .672

Period .497 -.435 -.545

Problem .468 -.501 -.434

Premium -.740

Collateral -.606

Fund -.525 -.430 .582

Table 2: Component Determination

From the 19 factors only 7 factors are having value more than 1. This means that these 7

statements can be used to explain maximum variance in the characteristics of people. The total

variance accounted by all the eight factors is 91.860 percent. This means that significant amount of

variance is explained by the reduced eight factors alone. Therefore it is better to take eight variables

alone for further analysis.

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Component Matrix

Component

Particulars 1 2 3 4 5 6 7 8

Repayment .843

Negotiating .843

Guarantees .561 -.430

History -.934

Action -.934

Analysis .622 .410

Report -.574 .496

Documentation .544

Information .488 .503 -.478

Reputation -.492 .755

Clients -.492 .755

Control -.588 -.722

Committee -.588 -.722

Forcing .672

Period .497 -.435 -.545

Problem .468 -.501 -.434

Premium -.740

Collateral -.606

Fund -.525 -.430 .582

Figure 3: Component Matrix Determination

Nineteen questions relating to factors influencing credit rationing were factor analyzed using

principal component analysis with Varimax with Kaiser Normalization rotation. These eight factors in

combination account for 91.860% of the total variance. We can also priorities the factors based on the

percentage of variance of each factor.

The first factors were labeled as credit history of the borrowers is which accounts for 22.29%

of the common variance. There are three items loading on this factor. The Second factor derived was

labeled action taken for non-repayment which accounts for 41.30% for the common variance. The third

factor was labeled that report required by officials which accounts for 56.57% of the common variance.

The fourth factor was labeled as negotiating with the bank which accounts for 67.53% of the common

variance. The fifth factors were labeled as repayment of the loan which accounts for 76.80% of the

common variance.

The sixth factors were labeled as analysis for credit analysis which accounts for 82.73% of the

common variance was labeled Achievement at given times. The seventh factors were labeled as

reputation of the client which accounts for 88.40% of the common variance. The eight factors were

labeled as client awareness about credit system which account for 91.86% of the common variance.

Chi-Square Test: Chi-square which is available in cross tab is used to test whether there is a significant

association between two variables. The two variables that are to be applied in chi-square analysis must

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be of type category. The total number of observation used in this test must be large i.e.,

n>=30.Independence - The observations are always assumed to be independent of each other. This

means chi-square cannot be used to test correlated data (like: matched pairs, panel data). It is

frequency based test.

CHI-AQUARE TEST

INCOME * TAKEN

CROSSTABULATION

Source

Particulars

Times of Loan Taken

Total Once Twice

Three

times

Four

times

More than

four times

Income

Less than 1, 20, 000 p.a 77 0 0 0 0 77

1, 20, 001-2, 00, 000 p.a 0 66 0 0 0 66

2, 00, 001-2, 80, 000 p.a 0 0 34 0 0 34

2, 80, 001-3, 60, 000 p.a 0 0 0 22 0 22

Above 3, 60, 000 p.a 0 0 0 0 41 41

Total 77 66 34 22 41 240

From the table it is found that the alternative hypothesis H1 is accepted since the significance

value is less than 0.05. This means that the customer’s income is the reason for the number of time loan

taken from the bank. And it gives a result as there is significance between income and number of time

loan taken from the bank.

Suggestion and Recommendation: The Pondicherry co-operative urban bank limited may appoint

such officials who go to the customer’s areas and make them aware about the policies of the banks in

their own languages. This will make the customers directly interacted with the bank & its policies. The

procedure of sanction of loan should be easy i.e. the number of documents required for it should be as

less as possible.

The Banks can have to launch the campaign for the awareness of bank polices in the all major

areas of the city. Additional credit union can be set up in the localities. The training for transaction with

the ATM or KCC card should be provided to customers of the bank. The bank should have to launch the

awareness programme to make customers aware about the guide lines and polices of the bank.

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CONCLUSION: From the study it is clear that Pondicherry co-operative urban bank limited has good

reputation from among other banks. All the customers from the bank are satisfied with the level of

service provided by the bank. If they follow the same policy and procedure they can have more number

of depositors to the bank and also they can retain them for a long period of time.

Since the study is deal with factors influencing credit rationing by Pondicherry co-operative

urban bank limited the major problem is found that the credit officers are taking more time to approve

the loan to the clients if they concentrate on this problem there will be more clients will approach the

bank in future period. So that majority of the population from the Pondicherry can get financial

assistant from the Pondicherry co-operative urban bank limited.

The purpose of this study was to establish the factors that influence credit rationing in co-

operative bank. The study sought to achieve the following objectives: The first objective was to

determine how firm characteristics influences credit rationing. The findings indicated that most banks

considered the level of debt in the borrower’s capital structure if the borrower’s level of debt is high

then the bank rations credit to such borrowers. This indicates that it is an important factor the bank

considers. The second objective was to investigate the factors influencing credit rationing towards loan

borrowers of Pondicherry co-operative urban bank limited. The findings indicated that most banks

rationed credit in order to reduce risk and to avoid risk of adverse selection and moral hazard and

limited technical capacity to monitor higher credit activity.

This indicates that the cost of borrowing has an important effect on the decisions of rationing

by the commercial banks. The third objective was to find out how observable characteristics which

influence for loan sanctioning by credit officers of Pondicherry co-operative urban bank limited. The

findings revealed that majority of the banks rationed credit because of information asymmetry

majority of the respondents indicated that lack of reliable information on credit worthiness of the

borrower, unfamiliarity with local economy and business environment and high cost of obtaining

information made the banks to ration credit.

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AUTHORS:

1. V. Subramanian

2. A. Ananda Kumar

PARTICULARS OF CONTRIBUTORS:

1. Assistant Professor (Senior Grade),

Department of Management Studies,

Christ College of Engineering &

Technology.

2. Professor, Department of Management

Studies, Christ College of Engineering &

Technology.

NAME ADDRESS EMAIL ID OF THE

CORRESPONDING AUTHOR:

Dr. A. Ananda Kumar,

No. 64, 2nd Floor,

Splendor Apartment,

Opp. to G. H.,

Ambour Salai, Puducherry-01

E-mail: [email protected]

Date of Submission: 23/07/2015.

Date of Peer Review: 24/07/2015.

Date of Acceptance: 26/07/2015.

Date of Publishing: 05/08/2015.

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