Relationship Banking, Collateral, and the Economic Crisis as Determinants of Credit Risk: An Empirical Investigation of SMEs

Krasniqi Besnik A., Kotorri Mrika () and Aliu Florin ()
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Krasniqi Besnik A.: PhD, University of Prishtina, Faculty of Economy & Kosovo Academy of Sciences and Arts, Republic of Kosovo
Kotorri Mrika: PhD, University of Prishtina, Faculty of Economy, Agim Ramadani St, p.n. Prishtinë, 10000, Republic of Kosovo
Aliu Florin: PhD, School of Expertness and Valuation, Institute of Technology and Business, Ceske Budejovice, Czech Republic

South East European Journal of Economics and Business, 2023, vol. 18, issue 2, 49-62

Abstract: This study examines the impact of relationship banking and collateral on the probability of firm loan default in Kosovo. Using a sample of 2,320 loan-level data from an individual bank credit register, findings indicate that stronger firm-bank relationships reduce the probability of default, and tighter credit policies regarding higher collateral requirements and interest rates have the opposite effect. Re-specifying the model to control for the banking sector concentration Hirschman-Herfindahl Index (HHI) and the Net Interest Margin (NIM), the firm-bank relationship is no longer statistically significant. Results show that the crisis negatively impacts credit risk, while HHI positively affects the probability of loan default. This evidence suggests that banking relationship matters only in competitive markets. To test the potential interaction effect between relationship banking and collateral, Fairlie’s (1999) decomposition technique is deployed. Our results imply that high concentration levels in the banking sector render firm-bank relationships relatively less important. This is of utmost importance for SMEs, banks, and policymakers.

Keywords: SMEs; asymmetric information; banks; collateral; debt maturity; economic crises; relationship lending; banking market concentration (search for similar items in EconPapers)
JEL-codes: G21 O16 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:seejeb:v:18:y:2023:i:2:p:49-62:n:7

DOI: 10.2478/jeb-2023-0018

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