Access to bank loans while in bankruptcy: the role of single vs. multiple banking relations

Abstract

Purpose – The purpose of this paper is to use a unique hand-collected data set from India to investigate whether firms with multiple banking relationships that are in bankruptcy get additional loans more easily than those with a single banking relationship. The authors find that firms that have a single banking relationship increase their bank borrowing by 5 percent every year compared to those with multiple banking relationships. The results are in contrast to the hypothesis that firms choose to have multiple banking relationships to increase the probability of getting additional loans in cases of financial distress. The results are consistent with the hypothesis that a larger number of banks increases the coordination and bargaining costs during bankruptcy and decreases the liquidation value of the assets, and that the banks take that into consideration before making loans. Design/methodology/approach – Regression and control. Findings – The choice of single vs multiple banking relationships is a widely studied topic in the banking literature. A large strand of theoretical and empirical literature argues that multiple banking relationships make it easier for a firm to get additional loans in case of financial distress. The study shows that such may not be the case in instances where bargaining and co-ordination costs due to poor bankruptcy procedures are severe. Originality/value – The authors use a unique hand collected data set from India to investigate if it is easier to get additional loans in bankruptcy for firms with multiple banking relationships compared to those with a single banking relationship.