Inside the credit boom: Competition, Segmentation and Information - evidence from Serbian credit market

In the context of rapid credit growth, the present paper investigates the supply side of the Serbian credit market. We use an on-site survey of banks aiming to describe financial intermediation by scanning the interest rates and other lending terms in Serbia. Findings from the survey suggest that the credit market is largely non-homogeneous and segmented, but with an increasing presence of competition. Motivated by these findings, we further use an original data set from the financial statements of Serbian banks for a time span of 2001 to 2005. Using both qualitative and quantitative approaches, we observe the existence of segments in the banking sector. One segment is characterized by a stronger presence of foreign banks, higher transparency of clients and stronger effects of competition on lending interest rates (lower spreads). Another segment is one with more domestic banks, less transparent borrowers and relatively higher banks' market power (higher intermediation spreads). The sources of segmentation are in our case represented by funding costs and ultimately by bank ownership. Using the GLS estimator on our panel dataset, we estimate the main determinants of bank interest margins as indicators of market power on the individual bank level. Then we test the effect of foreign bank presence on overall asset quality. We use the model developed by Dell'Ariccia and Marquez (2004) in order to explain the results of our regressions and to describe the segmentation. Their model stresses the role of information in shaping bank competition, where a lender with an information advantage (in case of Serbia, local banks) competes with an outside lender (foreign-owned banks) with less information, but potentially having a cost advantage in extending a loan. We believe that the proposed pattern of segmentation is in place in the Serbian lending market. The findings from the qualitative survey support this argument as well.