Impact of regional digital economy on default recovery: Evidence from China

Abstract

Using a unique sample during 2015–2019 from a nation-wide commercial bank, which contains nearly 40,000 loans and the recovery records of branch institutions covering the mainland China, we study the effects of the development of regional digital economy on loan default recovery rate. We find that the recovery rate of non-performing loans is increased where there is a higher level of development in the regional digital economy. This effect is more pronounced for small and medium-sized loans and branches at longer distances from their head office. The channels through which the digital economy affects banks' loan recovery are investigated. The digital economy improves the efficiency and convenience of banks' information processing and better tracks loan customer disconnections, leading to greater loan recovery. In addition, online judicial auctions, a relatively new mechanism for asset recovery, can improve the efficiency of asset processing and expedite loan repayment, thereby reducing banks’ loss due to loan defaults. We verified the robustness of the results by various methods such as quantile regression and logit transformation of recovery. By incorporating regional legal and marketization control variables, fixed effects and interaction terms, and the PSM methodology, we further reduce the potential endogeneity in the models.