Loading...
2 results
Search Results
Now showing 1 - 2 of 2
- Essays on banking credit acquisition: evidences from SMEs operating in adverse context: collateralization, mutual guarantees and borrowing discouragementPublication . Duarte, Fábio Dias; Gama, Ana Paula Bernardino Matias; Esperança, José Paulo AfonsoThis thesis consists in four papers addressing the difficulties of Small and Medium-sized Enterprises (SMEs) when accessing banking finance in a context of high informational asymmetries , during a period of financial crisis and adjustments of the banking capital ratios. A central characteristic of SMEs is their dependence on bank credit for external financing (Degryse and Van Cayseele, 2000). Asymmetric information and agency costs, however, underlie the inadequate financing of these firms. Previous studies show that, due to the lack of information on individual borrowers, banks issue restrictive loan term contracts to reduce their default exposure. Banks can cause the interest rate to become inefficiently high such that worthy firms are driven out of the credit market (Stiglitz and Weiss, 1981). Alternatively, firms with negative net present value projects could obtain financial support in the credit market by taking advantage of cross-subsidization of borrowers with worthy projects (Mankiw, 1986; De Meza and Webb, 1987). In both cases, the reason for market failure is that banks are unable to assess the actual riskiness of SMEs and are forced to offer the same contract to them with a different probability of success. Hence, to overcome screening errors, lenders may reject part of a firm´s loan request (i.e., type I rationing) or simply turn down the credit (i.e., type II rationing) (Steijvers and Voordeckers, 2009a). Recent studies show that when borrowers’ wealth is large enough, banks may bypass informational asymmetries by offering a menu of contracts with collateral requirements which, acting as a sorting device, mitigates the screening errors and the credit rationing for good firms. In this case, risky borrowers will be self-selected by choosing contracts with high repayment (i.e., high interest rates) and low collateral, while safe borrowers will choose contracts with high collateral and low repayment (Han et al., 2009a). Thus, in the design of loan term contracts, collateral assumes a key role as a risk management instrument (Bonfim, 2005). Its role, however, has been little studied in the field of entrepreneurial finance and has been validated, particularly, in the context of a market-based system that gives to SMEs a wider range of funding sources (La Porta et al., 1998). Furthermore, it seems entirely plausible that the role of collateral differs within developed and less developed countries (Menkhoff et al., 2012), surrounded by different levels of informational asymmetries (Hainz, 2003; Beck et al., 2006; Menkhoff et al., 2006), and that their efficiency depends on its nature (i.e., business versus personal collateral – Mann, 1997b). The features of collateral also depend on the characteristics of the individual loan and the firm (Berger and Udell, 1998; Columba et al., 2010) as well as the legal procedures for loan recovery (Zecchini and Ventura, 2009). If SMEs are unable to post collateral while they have a short credit history, meet less rigorous reporting requirements and the availability of public information is scarce (Columba et al., 2010) or if the legal system is inadequate to protect creditor rights (Zecchini and Ventura, 2009), their access to bank credit would remain restricted especially during economic downturns, with negative effects on industry Dynamics competitiveness and growth (Beck and Demirgüc- Kunt, 2006). In this context, in almost half of countries around the world several types of loan guarantee funds have been created to help SMEs to gain easier access to the credit market (Green, 2003; Gonzàles et al., 2006; Beck et al., 2010; Cowling, 2010; Honohan, 2010). The importance of mutual guarantee schemes (MGS) is destined to further increase in the light of the Basel II and III Capital Accords which state that the guarantees of such institutions can, if granted in compliance with some requirements, allow banks to mitigate credit risk with small business lending, and thus, save regulatory capital (SPGM, 2007; Cardone-Riportella et al. 2008). In the recent years, the allocation of mutual guarantees gained a momentum, especially in Organization for Economic Co-operation and Development (OECD) countries. Since the onset of the crisis in the international financial sector, MGS have been the privileged instrument to extend credit for SMEs without compromising the capital requirements of banks (Uesugi et al, 2010). However, the question whether third-party guarantee is an effective instrument to promote lending to SMEs is a controversial issue in both academic and policy literature (Cowling, 2010; Honohan, 2010; Boschi et al., 2014). Traditionally, practitioners and policy makers have been concentrating much of their attention in those firms that apply for bank credit and specifically on the credit rationing problem, marginalizing those firms which do not apply for loans, even when they need external financing. These firms are the so-called “discouraged borrowers” (Cavalluzzo et al., 2002). Although the theoretical model of Kon and Storey (2003) for “discouragement” is, in principle, applicable to both developed and less developed economies, it is expected that discouragement is higher in less developed countries due to lower business traceability (e.g., Chakravarty and Xiang, 2013; Brown et al., 2011; Cole and Dietrich, 2012). Empirical literature on the discouragement problem in less developed countries is, however, limited providing a fertile ground for the study of the causes for the existence of discouraged borrowers. Based on this theoretical and empirical framework, this thesis critically approaches underexplored dimensions of banking lending activity targeted to SMEs financing, such as: the collateralization policy; the role of mutual guarantees; and the discouraged demand for credit. In the first chapter we examine the simultaneous impact of observed characteristics and private information on SMEs´ loan contracts, using data from a major commercial bank operating in Portugal, gathered between January 2007 and December 2010. Using a multiperiod setting, this paper provides the first analysis of the sorting by signalling and self-selection (SBSS) model in a bank-based system. Furthermore, this chapter provides empirical evidence of the effect of macroeconomic conditions on loan contracts during credit crunch and recession periods. Using 12,666 credit approvals, the main results show that borrowers with good credit scores and a high probability of success as they are unlikely to default, are more willing to pledge collateral in return for lower interest rate premium (IRP). In an interactive and sequential event, we confirm that lenders tailor the specific terms of the contract, based on the observable characteristics, increasing both collateral requirements and IRP, for observed risky borrowers, in line with Han et al (2009a)´s SBSS model. However, we reject the positive effect of loan size, predicted by the SBSS model, in terms of loan price negotiation. We argue that loan size decreases the probability of collateralization and the loan interest rates, suggesting that larger loans increase the potential payoff for banks and are assigned to borrowers with good observable characteristics. As loan maturity increases, in contrast, the lender is more likely to demand collateralization and IRP, especially if the borrower is bad or unobservably good, in line with moral hazard arguments (Jensen and Meckling, 1976; Boot et al., 1991). This paper shows that our findings are robust when we predict the degree of collateralization offered by the borrower, adding strength to the SBSS model and contributing to overcome its empirical gaps underlined by Lambrecht (2009). The second chapter scrutinizes the role of mutual guarantees in Portuguese bank lending activity. Using data provided by the same bank, covering 11,181 loans granted to SMEs between January 2008 and December 2010, this paper provides the first appraisal of Portuguese MGS in response to the financial crisis. We examine the characteristics of firms benefiting from mutual guaranteed loans and analyzes the impact of mutual guarantees in loan pricing as well as on the ex-post performance of borrowers. The findings provide a comprehensive insight confirming the value of mutual guarantees to improve Portuguese banking loan activity, especially for good SMEs operating in a stressful context, reducing the costs of borrowing and improving the ex post default of borrowers. Thus, we suggest that mutual guarantees could be used to raise the loan´s recovery rate allowing banks to meet their commitments with banking regulation and supervision in the context of financial crisis. We also argue that these effects are especially noticeable by combining third-party guarantees and collateral. The third chapter extends the empirical evidences on the determinants of the collateral in loan contract terms in countries characterized by low informational traceability and low creditor protection. It uses the fourth-round database of the Business Environment and Enterprise Performance Survey (BEEPS) carried out between 2007 and 2009, covering 3,403 ultimately banking credit approvals for SMEs, operating in Eastern European and Central Asia less developed countries. This paper examines the incidence of business and personal collateral and its level reporting first-hand evidence regarding the impact of the recently reformed credit environment on collateral requirements. The findings endorse the importance in producing and sharing private information between lenders to reduce informational asymmetries and consequently the need to provide collateral to receive a loan. Moreover, we find that market concentration increases banks´ lazy-behavior by asking for collateral not to mitigate observable risk but to reduce screening efforts. We also prove that reforms around the depth of information-sharing instruments by public credit registries only have practical effects mitigating credit constraints and reducing the collateral requirements when coupled with public reforms on its coverage. In addition, this chapter shows that business and personal collateral have distinctive values addressing moral hazard and adverse selection problems, especially relevant in the context under study, advising caution on the practitioners’ extrapolations when modeling the determinants of bank loans collateralization. The fourth chapter examines the conditions that favor the existence of discouraged borrowers, using data provided by the fourth-round of the BEEPS. This paper selects 6,307 loan seekers, among which 2,207 SMEs are typed as discouraged borrowers and 4,280 are classified as loan applicants. We prove that whereas the firm´s opaqueness, demographic issues and distance between borrower and lender better explains the discouragement by tough loan price and/or loan application procedures, the firm´s risk and the banking concentration explains the incidence of discouraged borrowers by fear of rationing. Nonetheless, we argue that in a higher concentrated banking system, those firms with a closer and more intensive relationship with the bank are more likely discouraged to apply for a loan than distant borrowers. This is reasonable if we assume that these firms are more likely to rely on banks as their primordial source of finance, getting locked by the superior bargaining power of the credit provider in a context of low competition (Sharpe, 1991; Detragiache et al. 2000). In turn, this bargaining power may discourage the business to apply for new loans. The innovator status, the legal protection of borrowers and lenders in a default event and the coverage of information sharing instruments help to explain the discouragement in a transversal way.
- The role of collateral and relationship lending in loan pricing: evidence from United Kingdom SMEsPublication . Duarte, Fábio Dias; Gama, Ana Paula Bernardino MatiasThis study investigates how the use of collateral affects the incentives of borrowers, lenders and the relationship between them in loan pricing. Using the UK Survey of Small and Medium-Sized Enterprises 2008, the results from a simultaneous equation approach show that high quality borrowers choose a contract with more collateral and lower interest rate, suggesting that collateral acts as an incentive device to adverse selection problem in credit markets. By distinguish business and personal collateral the findings suggest that personal collateral seems to be more effective in acting as a sorting device in line with screening models. Regarding the nature borrower-lender relationship the results also show a substitution effect between relationship length and collateral requirements from the main bank. But the main bank uses explicit loan interest rate as a loss leader to secure long-term rents on relationship business, suggesting that inter-temporal shifting rents is possible.