There can be no substitute for the initial step of appropriate due diligence of past and expected results. Bankers should run scenario testing of pro forma financials, which applies probabilities to various future states, and a joint expected value is then calculated. The concept can only be effective if research is conducted to determine the causal factors that affect loan repayment. There is a gap in the literature in analyzing the behavior of corporate borrowers. The author suggests that non-performing loan experience should be studied over several years to develop regressions on various independent variables. | Bank lending to corporations: Scenario analysis as an alternative to traditional metrics
