Here’s how relationship lending benefits companies

Video content: https://www.youtube.com/watch?v=la5h-TndI8E&feature=youtu.be

Bankers and hairdressers have a lot in common. With both you – the customer - builds up a close, long-term intimate relationship  with repeated contact. Where the client – or the firm - has as little to no secrets.In banking, as a result of such a bond, firms can get more credit or can get credit cheaper– and banks get more profound insight into the company. We call this intimate connection, ‘relationship lending’, almost all SMEs use this. But who really benefits from this the most? The bank or the firm?

Lars Norden, endowed professor of Banking and Finance at Rotterdam School of Management, Erasmus University (RSM) will give his inaugural address, The Role of Banks in SME Finance, on Friday 20 February 2015. He will explore the role of banks in finance for small and medium enterprises (SMEs) and argue that relationship lending works, but that trade credit has limited scope to replace bank debt when banks are forced to cut their lending.

During his address Norden will focus on lending technologies such as relationship lending and trade credit arrangements that emerged to cope with key challenges in SME finance. He asks if lending technologies work, who benefits, and are there differences between countries? What do SMEs do when banks cut lending?

Basing his answers on two recent empirical studies, Norden will argue that relationship lending works. He will present evidence from a meta-analysis carried out across several countries that shows that, on average, borrowers benefit from relationship lending. They get more credit and lower loan rates. Furthermore, competition between banks makes it more likely that borrowers will get the benefits.

He will also argue that trade credit has limited scope to replace bank debt when banks are forced to cut their lending, as happened in the financial crisis. SMEs in Europe have offset shock to their bank debt to some extent with trade credit. However, substitution became difficult during the financial crisis and was only possible for a subset of firms, those with better quality credit histories and intermediate financial constraints.

His inaugural address will take place on Friday, 20 February 2015. The ceremony will start at 16:00 in the Senate Hall in the Erasmus Building at Erasmus University, Rotterdam, Burgemeester Oudlaan 50 in Rotterdam. A reception will take place at 16:45 in the same building. Read the news story on Lars' inaugural address here

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