Incentive Feasibility Analysis On Relationship Lending As Means Of SMEs' Financing

A lot of foreign banking experiences evidence that relationship lending is closely related to SMEs (small and medium-sized firms)' financing. Such as house banks in Germany, main banks in Japan and the long-term loan commitment of small and middle banks to SMEs. Those lending types are different from each other, but they have close ties between banks and firms in common. Relationship lending resolves the problem of small firms' opaque information and offers banks with enough monopoly rents. Since the middle of 90s, there have been a lot of articles on relationship lending because of the great development of banking to SMEs. Those articles research and discuss the costs, benefits and the determinants of relationship lending by establishing theoretical models or exerting experiential investigations. In China, because the monopoly of state-owned banks and the strict interest-control from the central bank, SMEs' financing has met lots of difficulties and there has been little of necessary conditions for developing relationship lending. As efficient means of ameliorating the problem of credit rationing, relationship lending has been misunderstood and accepted some negative appraisal unfairly for a long time. Domestic researchers have neglected this research area too. Only the main bank policy and the demand for firms' using base account made some attempt to start relations between banks and firms. These days, releasing the control of interest, developing private banks and resolving the problem of SMEs' financing have been brought into the agenda of banking reform, so researching the bank-firm relationship and offering theoretical guidance for the reform has become an important task for us researchers. In this article, we will compare different banking institutions, study an extensive literature on relationship lending, then explain the theory in the frame of neo-institutional economics systematically and with modeling demonstration. After specifying the costs, benefits and net-profit transfers, we will analyze the banks and firms' characteristics and surrounding factors subject to the participation and incentive constrains, finally draw our conclusion that: lending behaviors between banks and firms are diverse and always affected by the two parts' bargaining power, social environment or their cognition to the relation. We comment that SMEs and banks develop relationship lending which is prone to satisfy the participation and incentive constrains, and that relationship lending should be a feasible way of SMEs' financing. At last we survey the condition of SME's financing in China through questionnaire, conduct an experiential research on the background of developing relationship lending and give some policy suggestions.