Demand and supply determinants of loan contract terms in small business lending

Abstract

This thesis deals with demand and supply determinants of loan contract terms in small business lending. Chapter 2 presents results on loan maturity and is based on a cross-sectional dataset of German small business loans. I find a very robust positive and monotonic relation between risk and maturity. In the case of high asymmetric information this may be explained by theories on signaling. So, good borrowers choose short maturities to signal their good quality to the bank and to separate themselves from the bad borrowers. In the case of low asymmetric information this may be explained by relationship lenders assisting borrowers who experience financial difficulties by granting them longer maturities to ease their repayment pressure. Chapters 3 and 4 of the thesis explicitly use information from loan applications as well as loan contracts of loans made to micro, small and medium enterprises (MSMEs) by one Bulgarian bank between 2003 and 2007. Chapter 3 studies the determinants of the loan currency. Concerning the demand side, I find that firms are more likely to request EUR if they need larger, long-term or mortgage loans. My results also indicate that this is driven by firms’ anticipation that the bank is reluctant to grant such loans in local currency. On the supply side I find that the bank is more likely to switch the loan currency to EUR when it has more refinancing in EUR and especially when it has more EUR deposits. These findings imply that, in a country like Bulgaria, it will be most important to establish a stable and credible macroeconomic environment so that depositors are willing to save and banks to lend long-term in local currency. Another topic that has received much attention from academics as well as policy makers is credit rationing, but empirically there still remain questions on how big the actual extent of credit rationing is and how it evolves over bank relationships. In contrast to previous studies, I employ a more direct indicator of the actual extent of credit rationing, namely the ratio of granted to requested loan amounts, in chapter 4. My results indicate that credit rationing is considerable, especially in the beginning of bank relationships and for the more opaque borrowers. Moreover, the degree of credit rationing decreases over bank-borrower relationships and this decrease is indeed due to the bank’s willingness to increase its lending stakes over time. These results imply that efforts to create institutions which reduce informational asymmetries seem to be important in increasing small firms’ access to finance. Chapter 5 specifically looks at the effects of the 2007-2009 financial crisis on credit availability for MSMEs in Azerbaijan. The bank at the heart of this study experienced unexpected refinancing delays allowing me to examine an exogenous supply shock. At the same time, Azerbaijan’s economy is weakly diversified and highly oil dependent making it vulnerable to the economic crisis in the aftermath of the Lehman failure. The analysis reveals that the refinancing problems seem to impact on all loan types such as agro, micro and SME loans as the bank discourages new loan applications and grants fewer loans. The impact of the Lehman failure has more differential effects on the various loan groups: Agro loans are not affected, whereas the likelihood to be approved a loan application decreases considerably for SME loans. But especially for SME borrowers bank relationships seem to be important in mitigating these effects.