Abstract
This paper is a re-examination to what has been focused so far, on the role banks play in financing new business. Banks and moneylenders as they differ in their information on the borrowers and costs of funds, their linkage is particularly an area of interest. We have considered a three time period model to compare the monopolistic banking system framework with the two time period model. We get the results as per the conventional wisdom if we take the repayments required to be paid in first and second period equal. However, using the same model we check whether it is profitable for the banks to establish a lending relationship in a monopolistic banking system as has been argued by the literature so far. This paper shows that it might not be the case always. We find that the amount with which the banks' differ their payments in the two periods, has to satisfy some benchmark conditions to make banks create a scene of the lending relationship.
Published Version
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