Collateral In Smes’ Lending: Banks’ Requirements Vs Customers’ Expectations

SMEs’ support and importance in developing economies should not be only declarative. Searching for funding, managers encounter various obstacles arising from information asymmetry, lack of experience, severe market conditions, and insufficient or unsatisfactory collaterals for banks (OECD 2006; Badulescu and Badulescu 2010; OECD 2000 and 2004; Lin and Sun 2006; Toivanen and Cresy, 2000). The collateral issue is extensively discussed in literature – preventing moral hazard, the alignment the interests (Stiglitz and Weiss 1981:393-410; Chan and Thakor 1987:345-363; Jiménez and Saurina 2004), a means to discipline the borrowers behavior (ex post) given the existence of a credible threat (Aghion and Bolton 1992:473-494), or even banking behavior on the market (Manove et al. 2001:726-744, Argentiero 2009). In the same time we find that the perception of firms, revealed by European Central Bank (ECB 2009, 2010), shows that banks still use the collateral as a measure of pressure, in special in crisis times. For an important part of managers, the bank increased the level of required collateral for existing, renewing or new credits, asking for new covenants, revealing a paradox of crisis time: while the bank loans remained the favorite method of external financing needs of business, the banks often reduce their availability. Although the bank loan remains the favorite mean to support the growth ambitions, the higher level of collateral or lending costs are seen as principal obstacles by the majority of manager in EU. Furthermore, the seeking for higher percentage of coverage with real estate collaterals, paradoxically, makes banks more vulnerable, given their pro-cyclical behavior, feeding the real estate market crisis, as the theory of collateral as a signal of banking behavior “lazy banks vs. diligent banks”, gains a new understanding.