The Importance of Being Known: Relationship Banking and Credit Limits

Cresenta Fernando, Atreya Chakraborty () and Rajiv Mallick
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Cresenta Fernando: World Bank
Rajiv Mallick: Harvard Business School

Finance from EconWPA

Abstract: This paper measures the importance of bank-firm relationships in obtaining higher credit “limits.” We use data from a relatively unused section of the National Survey of Small Business Finance (NSSBF, 1993) on credit limits, credit sources, and contract terms for firms with lines of credit from multiple banks. This lets us isolate the credit limit that each bank provides the same firm, eliminating the need to control for often immeasurable, unreliable, or firm-specific “soft” information. For a median Line of Credit (LOC) of $250,000, we find that a bank with a five-year information advantage provides a LOC limit that is $20,000 higher. We also find that purchase of loan and non-loan services by firm from the contracting bank affects the credit limit differently. Non-loan services increase the credit limit and loan services decrease the credit limit. Our findings confirm anecdotal claims from the small business community that relationships are vital to secure higher credit limits. We check for the robustness of our results to outliers, sample selection, and stratification across firm organization types.

Keywords: Lending Relationship; Small Business Finance; Credit limits (search for similar items in EconPapers)
JEL-codes: M21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent and nep-rmg
Date: 2002-09-20
Note: Type of Document - PDF; prepared on Macintosh; to print on PostScript; pages: 28 ; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0209007

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