The Effects Of Bank-firm Relationships On Credit Finance Of SMES

Small and medium-sized enterprises occupy a critical status in the economy of a country(or a region). They are the engines of economic growth and the main force of job creation, and play an important role in new products development and technological innovation. However, the survival and development of small and medium-sized enterprises are plagued by financial constraints which are the results of the moral hazard and adverse selection problem caused by the low informational transparency. There are some firms whose financial needs are not sufficiently satisfied by the banks and some firms’ loan applications are denied directly. And there also some firms who are discouraged from applying a bank loan for various reasons.Basing on the combination of the primary source of information, screening and underwriting policies/procedures, structure of the loan contracts, and monitoring strategies and mechanisms, lending technologies can be roughly classified as follow: arm’s length transactional lending and relationship lending. As SMEs(especially for small-sized and micro-sized enterprises) generally have not established a standardized and credible accounting system, own insufficient collateralizable assets, and are lack of enterprise credit history, it is hard to use the lending technologies based on “hard information” sources( such as financial statements). Under relationship lending, banks acquire information over time through contact with the business, its owner, and its local community on a variety of dimensions and use this information in their decisions about the availability and terms of credit to the business. Therefore, relationship-based lending technology based on the “soft information” is suitable for banks when SMEs are the potential customs.Under the basis of the theory of financial intermediation in the paradigm of asymmetric information, the theoretical analysis shows that relationship-based lending technology has superiorities in supervision cost and screening technology which give rise to several potential benefits of relationship banking. The first benefit is relationship banking can facilitate a Pareto-improving exchange of information between the bank and the borrower. With relationship banking, a borrower might be inclined to reveal more information than in a transaction-oriented interaction and the lender might have stronger incentives to invest in producing information. The second benefit is related to the fact that relationship banking accommodates several special contractual features that can improve welfare: Relationship lending allow for improving contracting flexibility between the bank and the firm as well as the ex post discretion for bank in using the information that may not be easily transmitted to the third-party, which in turn promote to establish and maintain crytic long-term contract relationship between banks and firms; improve contracting flexibility between the customer and bank, reduce agency problems through increased control, enable reputation-building, and ensure confidentiality relationship lending may include extensive covenants that allow for a better control of potential conflicts of interest. Thirdly, for the information-sensitive borrowers, relationship lending may increase the availability of credit to this kind of firms and prevent the valuable private information leaked to other competitors in the meantime. However, relationship-based lending technology may have the potential disadvantages which are called as soft-budget problem and hold-up problem.Based on theoretical analysis, the SMEs’ bank-loan financing activities are divided into three decision stages in the thesis: the first is the stage of loan application decisions by SMEs, the second is the stage of loan approval decision by commercial banks, and the last is the stage of setting decision of loan interest rate charged by banks. These three ordered stages are modeled as a double sample-selection model. Using an enterprise level data from a national survey conducted in China from World Bank, we investigate the effects of bank-firm relationship indices on t he credit availability of SMEs. The main results of the empirical research are as follow. First, the number of bank relationships maintained by a firm has significant effects on the probability of an enterprise applied for a loan, the likelihood of a bank approved the application, and the level of interest rate of the bank loan. Additionally, the index of depth of the main bank relationships also has a significant negative effect on the loan interest rate. Secondly, firms with the following characteristics are more likely to apply for a loan in the first stage: few bank relationships, smaller size, lower profitability, lack of the financial statements audited by external qualified auditors, failed to set up t he system of board of directors, facing more intense horizontal competition, and less ownership proportion owned by government department. The last empirical result is that firms which are more likely denied by banks are featured as follow: with significantly fewer employees and total assets, higher ratio of liabilities to total assets, notably poorer profitability, lower probability to set up a system of board of directors, and exist in a more intense horizontal competition environment.For the better development of relationship-based financial services in China, in turn for the alleviation of the financial constraints confronted by the small and medium enterprises in their process of the survival and development, there are some targeted policy recommendations are proposed in connection with different subjects. We recommend that banks: To improve the internet platform of financial services, decrease the transaction costs; To establish the professional talent team that accommodating the relationship-based financial technology;For attempting to establish the banks with the characteristics of regional exclusive and industrial cluster, we suggest the small and medium enterprises should strengthen the internal business management, establish and improve modern corporate system, and get rid of extensive business style of the patriarch-based management, build up faith-based corporate culture and good corporate reputation. We also propose the fiscal and tax sectors to study and formulate the policies of tax reductions and exemptions, for the purpose of relieving the tax burdens and enhancing the profitability of the small and medium enterprises.