Examining Main Bank Relationships in SME Finance
- The Correlation between Efficiency and Lending Attitude among Regional Financial Institutions -

Author Name HARIMAYA Kozo  (Faculty of Economics, Sapporo Gakuin University) /NAGATA Takahiro  (Rating and Investment Information, Inc.)
Creation Date/NO. January 2006 06-J-002
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This study examines the main bank relationship in SME finance, targeting solely SMEs using regional financial institutions (regional banks, second-tier regional banks, and credit associations) as their main banks and empirically analyzing the correlation between main bank efficiency and lending attitude. Conventionally, individual financial statement information such as non-performing loan ratios and capital adequacy ratio were used as indicators of the soundness of main banks in the previous literature, but cost efficiency calculated using a stochastic frontier approach is a superior indicator for showing differences in relative soundness, since this indicator is derived from and reflects the production cost structure of the banking industry as a whole. The empirical results gained from this study can be summarized as follows: Firstly, when the relationship between indicators such as non-performing loan ratios and cost efficiency was examined to check the use of cost efficiency as an indicator of soundness, it was confirmed that cost efficiency is a comprehensive indicator significantly influenced by key balance sheet information. Secondly, concerning the impact of cost efficiency on lending attitude, it became evident that the more cost efficient the main bank, the more positive a response it gave to borrowers' requests for additional funds. Further, the results showed that the more cost efficient the main banks, the more they tended to place less severe demands on borrowers in terms of existing borrowing arrangements. Finally, with regard to the correlation between lending attitude and changes in a main bank's cost efficiency, it has been suggested that main banks that raised short-term interest rates on existing loans or requested to increase savings were more likely to improve their cost efficiency in the following fiscal year.