Government connections and credit access around the world: Evidence from discouraged borrowers

Qi, Shusen; Nguyen, Duc Duy

doi:10.1057/s41267-020-00341-x

Cited by 23 publications

(12 citation statements)

References 27 publications

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“…Some studies (Cole & Sokolyk, 2016 ; Freel et al, 2012 ) show that discouraged borrowers can outnumber actual turndowns. Other work has focused on ethnicity (Fraser, 2009 ), gender (Freel et al, 2012 ), Eurozone economies (Mac an Bhaird et al, 2016 ), the role of bank-firm trust (Tang et al 2017 ) and the potential for political connections to influence banks’ decision-making (Qi & Nguyen, 2021 ). Importantly, estimates from this body of empirical work also suggest that between one third and one half of discouraged borrowers would have been offered a loan had they applied.…”

Section: Literature Reviewmentioning

confidence: 99%

Has previous loan rejection scarred firms from applying for loans during Covid-19?

2021

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The concept of the ‘discouraged’ borrower is well documented. In this paper, we consider whether smaller firms in the UK who have been previously rejected for bank loans have been scarred by the experience so badly that even in the presence of two exceptionally generous Covid-19 loan guarantee schemes, they still refuse to make an application. Furthermore, we also consider what happens when they do. As banks have either zero or minimal loss exposure, do they still maintain their normal strict lending protocols or do they relax their standards to fulfil the governments’ objective of supporting struggling businesses through the crisis? Our findings show that 72% of previously rejected borrowers are reluctant to request loans. We find some evidence that previously scarred firms faced such severe liquidity problems that they relaxed their distrust of banks during the Covid-19 crisis. However, their share of the government-guaranteed loan portfolio was slightly lower suggesting that banks were treating each new loan application on its merits. Plain English Summary The Covid-19 crisis hit smaller businesses so hard that even previously rejected borrowers were forced to apply for loans to keep them afloat. Previous loan rejections have not discouraged small businesses in the UK in applying for Covid-19 government-guaranteed loans. Banks have used the loan guarantee schemes to continue to supply loans to small business during the pandemic. Our paper analyses the important phenomenon of borrower scarring and discouragement, when potential debtors are self-excluded from the lending market because they have previous rejections or expect a negative bank response. We consider around 45,000 UK small businesses from 2018 to 2020. On the demand side, we find that the economic shock for small businesses during the pandemic dissipates the scarring effect. Specifically, we find that micro and small businesses had the highest loan demand in the first two quarters of the pandemic (from March 2020). On the supply side, we show that scarred borrowers were not routed onto Covid-19 government-guaranteed loan schemes. These findings show the importance of government-backed lending schemes for small businesses during crisis period.

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Section: Literature Reviewmentioning

confidence: 99%

Has previous loan rejection scarred firms from applying for loans during Covid-19?

2021

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“…This dataset has also been used by other international business scholars (e.g.,Qi and Nguyen, 2020).…”

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confidence: 99%

Is there an employee-based gender gap in informal financial markets? International evidence

2020

Journal of Corporate Finance

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“…In a seminal contribution, Kon and Storey (2003) outline how actual or perceived barriers to accessing external finance may deter SMEs from applying for credit altogether-so-called discouraged borrowers. Prior evidence suggests that there are significant variations in borrower discouragement across countries (Macan Bhaird et al, 2016;Qi and Nguyen, 2021). Rostamkalaei et al (2018) report that the incidence of SME borrower discouragement varies between 1 and 45%.…”

Section: Borrower Discouragementmentioning

confidence: 99%

Innovation and borrower discouragement in SMEs

2022

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In this paper, we investigate whether innovative small- and medium-sized enterprises (SMEs) are more likely to be discouraged from applying for external finance than non-innovators. These so-called discouraged borrowers are credit worthy SMEs who choose not to apply for external finance despite the fact that this is needed. We find that SMEs undertaking pure product and joint product and process innovation have a significantly higher incidence of borrower discouragement than non-innovative counterparts. Moreover, radical and incremental product innovators are more likely to be discouraged relative to non-innovative counterparts. Innovative activity can increase borrower discouragement for a myriad of reasons including fear of rejection, reluctance to take on additional risk, negative perceptions of the funding application process and perceived negative economic conditions. Overall, our results suggest a need for targeted policy interventions in order to alleviate borrower discouragement within innovative SMEs, as well as a closer alignment between innovation and SME finance policy.

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Government connections and credit access around the world: Evidence from discouraged borrowers

Cited by 23 publications

References 27 publications

Has previous loan rejection scarred firms from applying for loans during Covid-19?

Has previous loan rejection scarred firms from applying for loans during Covid-19?

Is there an employee-based gender gap in informal financial markets? International evidence

Innovation and borrower discouragement in SMEs

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