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The Importance of Being Known: Relationship Banking and Credit Limits

Author

Listed:
  • Cresenta Fernando

    (World Bank)

  • Atreya Chakraborty

    (The Brattle Group)

  • Rajiv Mallick

    (Harvard Business School)

Abstract

This paper measures the importance of bank-firm relationships in obtaining higher credit “limits.” We use data from a relatively unused section of the National Survey of Small Business Finance (NSSBF, 1993) on credit limits, credit sources, and contract terms for firms with lines of credit from multiple banks. This lets us isolate the credit limit that each bank provides the same firm, eliminating the need to control for often immeasurable, unreliable, or firm-specific “soft” information. For a median Line of Credit (LOC) of $250,000, we find that a bank with a five-year information advantage provides a LOC limit that is $20,000 higher. We also find that purchase of loan and non-loan services by firm from the contracting bank affects the credit limit differently. Non-loan services increase the credit limit and loan services decrease the credit limit. Our findings confirm anecdotal claims from the small business community that relationships are vital to secure higher credit limits. We check for the robustness of our results to outliers, sample selection, and stratification across firm organization types.

Suggested Citation

  • Cresenta Fernando & Atreya Chakraborty & Rajiv Mallick, 2002. "The Importance of Being Known: Relationship Banking and Credit Limits," Finance 0209007, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0209007
    Note: Type of Document - PDF; prepared on Macintosh; to print on PostScript; pages: 28 ; figures: included
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    References listed on IDEAS

    as
    1. Berger, Allen N. & Klapper, Leora F. & Udell, Gregory F., 2001. "The ability of banks to lend to informationally opaque small businesses," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2127-2167, December.
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    6. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
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    Cited by:

    1. Carlos Arriaga & Luis Miranda, 2009. "Risk and Efficiency in Credit Concession: A Case Study in Portugal," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(3), pages 307-326.

    More about this item

    Keywords

    Lending Relationship; Small Business Finance; Credit limits;

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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