Abstract
Restricted access to finance is often stated as one of the main obstacles to the development of the SME sector in Russia. In this paper, we propose a new lending strategy that allows private banks to profitably increase financing of this sector in spite of being at a disadvantage compared to the state owned Sberbank. By building a reputation for tough liquidation in cases of financial distress private banks can overcome information asymmetries by self selection. However, this strategy can only work if (i) bankruptcy law allows for easy liquidation, (ii) the banking industry can sustain positive profit margins, and (iii) interest rates are not too high.
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