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Who Needs Credit and Who Gets Credit in Eastern Europe?

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  • Martin Brown
  • Steven Ongena
  • Alexander Popov
  • Pinar Yesin

Abstract

Based on survey data covering 8,387 firms in 20 countries we compare credit demand and credit supply for firms in Eastern Europe to those for firms in selected Western European countries. We find that, while 30% of firms do not need credit in Eastern Europe, their need for credit is higher than in Western Europe. The firm-level determinants of credit needs in Eastern Europe are quite similar to that in Western Europe: Firms with alternative financings sources, i.e. government-owned, foreign-owned and internally financed firms, are less likely to need credit. Small firms are also less likely to demand credit than larger firms, suggesting that they may have limited investment opportunities. We find that a higher share of firms is discouraged from applying for a loan in Eastern Europe than in Western Europe. Firms in Eastern Europe seem particularly discouraged by high interest rates compared to firms in Western Europe, with collateral conditions and loan application procedures also more discouraging. The higher rate of discouraged firms in Eastern Europe is related to a stronger reluctance of small and financially opaque firms to apply for a loan compared to Western Europe. While many discouraged firms correctly anticipate that their loan applications would be rejected, a large majority of discouraged firms seem to be creditworthy. At the country-level we find that the higher rate of discouraged firms in Eastern Europe is driven more by the presence of foreign banks than by the macroeconomic environment or the lack of creditor protection. We find no evidence that foreign bank presence leads to stricter loan approval decisions. Our findings suggest to policy makers that the low incidence of bank credit among firms in Eastern Europe, compared to Western Europe, is not driven by less need for credit or banks' reluctance to extend loans. The main driver seems to be that many (creditworthy) firms are discouraged from applying for a loan, due to high interest rates, collateral conditions and cumbersome lending procedures. As discouragement is particularly high among small and opaque firms, as well as in countries with a strong presence of foreign banks, it seems that firms perceive lending standards to have become more reliant on "hard information" with the entry of foreign banks. However, as loan rejection rates are not related to foreign bank presence, it seems that firms' perceptions of the likely lending conditions may be too pessimistic. Thus more transparency about credit eligibility and conditions may improve credit access, particularly in countries with a high presence of foreign banks.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2010-09.

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Length: 58 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:snb:snbwpa:2010-09

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Keywords: Banking; Credit; Transition economies;

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References

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Citations

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Cited by:
  1. Steven Ongena & Alexander Popov, 2010. "Interbank market integration, loan rates, and firm leverage," Working Paper Series 1252, European Central Bank.
  2. Berg, Gunhild & Kirschenmann, Karolin, 2012. "Funding vs. real economy shock : the impact of the 2007-2009 crisis on small firms'credit availability," Policy Research Working Paper Series 6030, The World Bank.
  3. Stijn Claessens & Neeltje van Horen, 2013. "Impact of Foreign Banks," DNB Working Papers 370, Netherlands Central Bank, Research Department.
  4. Alexander Popov & Gregory F. Udell, 2010. "Cross-border banking and the international transmission of financial distress during the crisis of 2007-2008," Working Paper Series 1203, European Central Bank.
  5. Martin Bijsterbosch & Tatjana Dahlhaus, 2011. "Determinants of credit-less recoveries," Working Paper Series 1358, European Central Bank.
  6. Nakhoda, Aadil, 2012. "The influence of financial leverage of firms on their international trading activities," MPRA Paper 35765, University Library of Munich, Germany.
  7. Martin Brown & Steven Ongena & Pinar Yesin, 2012. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Working Papers 2012-05, Swiss National Bank.
  8. Christian Keuschnigg & Peter Egger, 2010. "Innovation, Trade and Finance," University of St. Gallen Department of Economics working paper series 2010 2010-08, Department of Economics, University of St. Gallen.
  9. Christa Hainz & Tatjana Nabokin, 2013. "Measurement and Determinants of Access to Loans," CESifo Working Paper Series 4190, CESifo Group Munich.
  10. Jarko Fidrmuc & Mariya Hake & Helmut Stix, 2011. "Households’ Foreign Currency Borrowing in Central and Eastern Europe," Working Papers 171, Oesterreichische Nationalbank (Austrian Central Bank).

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