The internal performance measures of bank lending: a value‐added approach

Purpose – To solve problems of overdue loans and bad debts, the research establishes the internal performance measures to monitor and enhance the operational qualities of the employees in the lending department. Design/methodology/approach – The research utilizes the value‐added approach to analyze the lending production process and derive the internal performance measures to add value to lending activities. Findings – Compared with final measures (data envelopment analysis, benchmark, and productivity measures), the internal performance measures proposed in this research would be more effective for evaluating the job performance of employees in lending activities. A comprehensive analytical framework that will improve the accuracy of analyzing a borrower's capacity and condition has also been constructed in this research. Research limitations/implications – The conclusions in this research have been derived from deductive method. Some empirical study in confirmation of the conclusions in this research could be the direction for future research. Practical implications – The practical implication of using internal measure to monitor the output quality of the employees in lending department is a reduction in the likelihood of employee's moral hazard behavior. Originality/value – The past researches in measuring the performance of bank lending have focused on the final measures that are incapable of solving the problems of overdue loans and bad debts. The value of the internal performance measure approach would ease the lending operational risk that is one of the main purpose of Basel II.