Are China's Financial Reforms Leaving the Poor Behind - Harvard ...

correlations rather than making causal inferences. Columns 5-8 of Table 10 report theresults linking non-performing loans in 1997 to bank governance. In each of theregressions, we also include township per capita income as an additional control variable.For comparison, column 5 reports the results of the bivariate regression of nonperformingloans on income. 15The regressions are nicely suggestive of the role ofgovernance. We find that the percentage of non-performing loans is negatively correlatedwith branch manager bonus incentives, the use of collateral, freedom from governmentpressure, and authorization limits (insignificantly), and positively correlated with thelength of time required to resolve cases legally. The percentage of non-performing loansis also significantly lower in higher income areas. This may be picking up overall higherloan quality, and possibly unobserved dimensions of local governance structures that arecorrelated with incomes.In column 7, we include as an additional explanatory variable the interactionbetween loan authorization limits and managerial bonus incentives. As in column 6, theindividual coefficients on these two variables remain negative, and now are significant at5 percent. The positive coefficient on the interaction term, however, suggests that acombination of high authorization limits and powerful incentives contributes to aweakening of the quality of the loan portfolio. One interpretation for this result is that thecombination leads to excessive risk-taking on the part of branch managers that ultimatelylead to an increase in the percentage of non-performing loans. It also suggests the needfor higher authorities to properly balance incentives and rights. In column 8 we include asan additional regressor information on quarterly reporting requirements of the bank15 The results are robust to including provincial fixed effects, controlling for branch type, and to excludingthe income variable.27