How Banks Deal with the Financial Information of Medium Sized Firms in the Credit Assessment Process : A study of banks in Pakistan

Abstract: Financial information of a firm helps the users of the financial information to understand the financial standing of the firm. Banks as lenders to Medium Sized firms use the financial information in the credit assessment process. The availability and quality of the financial information depends on the information environment of the country. We have conducted a quantitative study where we examined 80 loan applications of the Medium Sized firms to the Big4 private banks inPakistan. We collected the data of 80 loan applications by the Medium Sized firms of which in 40 cases, the banks granted loans and in 40 cases, the banks rejected the loan applications. We wanted to create a representative sample of the population that leads us to choose snowball sampling that is non-probability technique in our research to find the responsible persons in the banks who can give us our desired data. To get the desired data from the bank officials, we have used close ended questionnaire to collect the data on different variables of availability of financial information, the quality of financial information and the verification of financial information with relation to loan decisions. We have analyzed the impact of the availability of financial information variables i.e. number of years’ financial statements, bank account statement, income tax return and audit on the loan decisions of the banks. Later, we analyzed the impact of the quality of financial information on the loan decisions and on the verification process of the banks. We used univariate data analysis to summarize the data and to examine the descriptive statistics such as mean and standard deviation of the dataset. We also used Crosstabs in SPSS, Chi-square test and regression to find out the relationship between the financial information and loan decisions. We have conducted Chi-square to measure the statistical significance to check the p-value to accept or reject the hypotheses. We have found that if more number of years’ financial statements, income tax return and audit is available, the banks are more likely to make grant decision. However, bank account statement does not have any effect on the loan decisions of the banks. Later, we found that the banks are more likely to grant loans to Medium Sized firms if the quality of the financial information is not poor. If the quality of the financial information is poor, the banks adopt a strict way of verification of the financial information.