Soft Information Management Effects on Lending Credit Terms in Japan

This paper aims to make four main contributions to the already existing literature regarding relationship lending. The first is to provide Japanese empirical evidence from lender-side data to show that the utilization of soft information has a positive effect on the credit decision. As of 2008, more than 60% of all Mega and Regional banks, including both Tier I and Tier II classifications, and more than 50% of Community Banks and Credit Unions, utilize soft information in evaluating a borrower' s creditworthiness, which is further reflected in credit term decisions. However, these observations also run contrary to the current small business lending paradigm where Community Banks and Credit Unions focus on the utilization of soft information lending technologies, such as relationship lending, rather than hard-information technologies, such as the credit score (Berger and Udell, 2006). Amongst Japanese lenders, the soft information usage level is much smaller within Community Banks and Credit Unions compared to that found in the Mega banks and Tier I, Tier II Regional banks. The second contribution of this paper is to study the effects of an organizational structure on credit term decisions. The SMRJ survey data includes the lending managers' opinions regarding the influence soft information has on credit terms, such as the amount offered, the collateral amount, the interest rate, and the length of financing. We specifically viewed the amount offered as a function of the organization' s size. Here, we assume two things: 1) that large organizations have an hierarchical structure, and 2) that the soft information substance will become ineffective when it is transferred from the loan officers to the lending managers. The results, however, reveal that an organizational structure does not actually affect substantial lending decisions, and that the utilization of soft information in lending decisions requires a comparatively large organizational strength. In Japan, where there is a great number of Community Banks with a diversified organizational size, a differentiation in firm size leaves small Community Banks incapable of using soft information, while relatively large Community Banks are able to utilize soft information in a credit decision. Our third contribution is to study whether a standardized soft information list has an affect on shifting a loan officer' s assessment more towards relationship lending. Facilitating a standardized form actually limits soft information that is inherently diversified amongst borrowers. However, a lot of professional affiliations, such as the Japanese Institute of Certified Public Accounts, and Government affiliations, such as the Ministry of Economic and Trade Industry, have proposed the facilitation of a standardized form to generate lender technologies used in relationship lending. We found that the standardized list curbs the affect of relationship lending upon the lending decision especially for the comparably larger structured banks. For small lenders, however, especially at the starting point, a standardized method would be beneficial in order to generate relationship lending technologies. Our final contribution is to pioneer an examination of systematic management effects on soft information utilization in substantial lending decisions. Such an analysis was not possible in earlier studies, because the organizational management is an inherent part of the organization' s strategy making it difficult to use outside information to assess whether lenders purposefully facilitate that management style or not. A comprehensive SMRJ survey would enable us to identify the form of systematic management. The results suggest that systematic management hinders the affects of relationship lending upon the lending decision. These results, however, appear to be limited to the comparatively larger structured banks. Systematic management would be beneficial for small lenders who have a lower soft information usage level, because it can be useful for implanting soft information in a loan officers' common practice in accessing borrowers and assessing their creditworthiness.