The effect of relationship banking on SMEs’ credit access conditions: Empirical evidence from Brazil

Abstract

Objectives: Small-sized financial institutions stand out in serving SMEs due to their comparative advantages in the use of relationship-based credit. This study explores the impact of the relationship between a small financial institution and SMEs on credit access conditions. Methodology: The research employs the ordinary least square multiple regression method (OLS) on a dataset comprising 194 loan agreements from a small financial institution, which were contracted by 43 SMEs. The dataset includes financial information and records regarding the relationship strength with the creditor from 2015 to 2019. Results: The parameters of the OLS models that measured the association between the cost of credit, credit line available and average maturity with the bank relationship profile showed statistically significant results. Conclusions: The findings suggest that the duration of the banking relationship and the number of services contracted do not significantly affect the cost of credit. However, a noteworthy association is observed between credit concentration within the small-sized bank and higher costs for clients. Additionally, the length of the banking relationship directly influences the credit line available to SMEs. Interestingly, the impact of guarantees offered on credit conditions does not justify long credit transactions. Furthermore, an inverse relationship emerges between the credit rating of SMEs and the credit term.