Estimating the Recovery Rates for Unsecured Loans to Small Sized Firms

Abstract We analyze the recovery rates of 66,928 Japanese unsecured loans in default by ordered logistic regression. We divide the defaulted firms by sole proprietorships and industrial corporations and analyze the recovery rates for each type of firms. The recovery rate for sole proprietorships is larger than that for industrial corporations. Moreover, we model not only the recovery rate during five years at the time of default but also that evaluated at the time of loan appraisal for each type of firms, and we call them “loan model” and “after-default model” respectively. The significant factors with large regression coefficients are different for each model and each type of firms. We find that these are (1) guarantee by business owner’s family in two models for each type of firms, (2) firm age in two models for industrial corporations, (3) exposure rate at default in the after-default model for each type of firms, (4) obligor’s real-estate value minus debt amount, initial loan amount, and white tax return in the loan model for sole proprietorships. The values of Somers’ D for the after-default model are larger than those for the loan model because the exposure rate at default which has large estimates can be available at time of default. The values of Somers’ D for sole proprietorships are larger than those for industrial corporations. We divide all defaulted loans into four classes based on the score evaluated by the model, and validate the ratings of the actual recovery rates through three kinds of statistical tests. In addition, we conduct out-of-sample tests, and examine the usefulness of the model.