The lending banks’ function of loan monitoring plays an important role in sustaining quality loan portfolios and protects risk assets against deterioration thereby keeping non-performing loans (NPLs) within acceptable standards. It is expected that the outcome will assist policymakers in protecting and/or improving the current state of NPLs among AEC member countries. This paper proposes a framework by adding a moderator of loan monitoring to the existing models of the macroeconomic determinants of NPLs with special attention to the AEC countries that mostly were once heavily confronted with severe banking and financial crises in the late 90s. Most of the previous studies have focused on macroeconomic and other environmental variables, industry-specific and bank-specific determinants of NPLs but gave less attention to the moderating role of loan monitoring functions of the lending banks. Many attempts have been made to investigate the determinant of NPLs yet the problem has remained unexplained. The global problem of NPLs has been persistent and on the rise. The aim of this paper is to propose a conceptual model/framework of investigating the moderating role of loan monitoring on the relationship between macroeconomic variables and NPLs among Association of Southeast Asian Nations Economic Community (AEC) countries. This paper substantially revises and supersedes the paper "Checking accounts and bank monitoring". The authors also find that banks more intensively monitor loans that have a higher number of violations of the collateral limit. Since the bank monitors the value of collateral (defined as accounts receivable plus inventory) at high frequency through the transactions account of the borrower, this unique access to useful information gives banks an advantage over other lenders. Using a unique set of data that includes monthly and annual information on small-business borrowers at an anonymous Canadian bank, the authors find a significant relationship between loans becoming troubled and the number of prior borrowings in excess of collateral. This information is most readily available to commercial banks, but other intermediaries, such as finance companies, also have access to such information at a cost. The authors provide evidence that transactions accounts help financial intermediaries monitor borrowers by offering lenders a continuous stream of data on borrowers’ account balances.
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