The Dynamics in Requested and Granted Loan Terms When Bank and Borrower Interact Repeatedly

Abstract

This paper studies how credit constraints develop over bank relationships. I analyze a unique dataset of matched loan application and loan contract information and measure credit constraints as the ratio of requested to granted loan amounts. I find that the most important determinants of receiving smaller than requested loan amounts are firm age and size at the time of the first interaction between borrower and bank. Over loan sequences, credit constraints decease most pronouncedly in the beginning of relationships and for the initially young and small firms. Moreover, the structure of the dataset allows me to disentangle the demand and supply effects behind these observed credit constraints. I find that the gap between requested and granted loan amounts decreases because both sides converge. If previous credit constraints were large, requested amounts increase more moderately, while granted amounts increase more strongly than in the case of small previous constraints. The findings are a sign of the use of dynamic incentives at the bank side to overcome information problems when contracting repeatedly with opaque borrowers. The results further suggest that, particularly in the beginning of a bank relationship, borrowers learn from their previous experience with credit constraints and adjust their demand accordingly. as well as seminar participants at the University of Mannheim for helpful comments and suggestions. I am especially grateful to the management and employees of the bank which provided me with the data. The paper was partially completed while I was visiting the Finance Department of Tilburg University whose hospitality I greatly appreciated.

The common drivers of default risk

“…According to anecdotal evidence, bank practitioners follow a rule of thumb that long-term loans are given only to either secure borrowers or if secure collateral is pledged. This rule is confirmed by Kirschenmann (2010) who compares loan applications with loan grants. She finds restricting loan maturity to be complementary to restricting loan size and both to be used more frequently as information asymmetry between borrower and lender increases.…”

Discussion of Presbitero, Udell, and Zazzaro

“…When it comes to measuring credit rationing, the study by PUZ is itself constrained by the information it has access to, but it is also confusing in reporting what it actually has. PUZ do not have data on the credit amount (or any other loan conditions) the firm was requesting as in Kirschenmann (), Brown, Kirschenmann, and Ongena (), and Chong, Lu, and Ongena (), among others. The survey question on which the rationing variable is based is reported as follows.…”

Relational Contracting Under the Threat of Expropriation - Experimental Evidence

“…Ioannidou and Ongena, 2010) they typically cannot distinguish whether this is due to increasing investment opportunities of the borrower over time or a relaxation of credit constraints. Kirschenmann (2010) examines credit constraints over the course of microfinance relationships by contrasting the desired loan…”