A Study On The Impact Of Credit Relationship On SME Loan Interest Rate

This dissertation focuses on how to lower bank financing cost of high quality SMEs. We start with an overview and a brief analysis of the current picture of SME financing. On the backdrop of IR liberalization, bond market development&financial disintermediation and numerous policy efforts, credit availability saw substantial improvements while the financing cost of SMEs has not. Higher risk, informational opacity and a lack of collateral are inherent factors, while a mismatch between the financial system and SME demand, the consequent lack of competition in this field are key outside factors. As a result, resolution of information asymmetry, improvement of financial supply structure and intensification of SME business competition are the right medicines.We establish a model that depicts the whole process from information asymmetry to information production, information diffusion and the credit pricing game under the framework of relationship leading theory. The model shows that leading relationship can attenuate reverse selection and moral hazard problems through learning and incentive effects, but the consequent decline of credit risk will not necessarily translate into lower interest rate without bank competition. More competition brings to a lower rate. The model further shows that higher information production capability of the inside bank may even result in a higher interest rate when competition is absent. To sum up, relationship lending alone can not lower interest rate. Bank competition is the catalyst.Our empirical study uses a sample of234SME bank lending records from Ningbo, Zhejiang province during2007-2010. We find relationship variables not significant in the whole sample regression, while significant in the median-sized firm subgroup, not significant in the small firm subgroup when we further divide the sample. This result is consistent with our model forecast since the field of median-sized firm lending is more competitive. In addition, subgroup regression finds bank’s different loan pricing modes against firms of different scale.Our general policy suggestion is to add bank competition in SME lending field. Specific ones include the development of small-median banks, the introduction of new lending techniques and the fostering of bond market and IR liberalization.