Credit Market Competition Influence On Relationship Lending

To solve the problem of financing SMEs, foreign scholars introduced the concept of relationship lending. Relationship credit financing is a kind of credit based on relationship between the bank and the enterprise. With the cooperative relation, the bank could get inside information and issue a loan on this basis. In some ways such a relationship solves the financing difficulties caused by the asymmetric information problem that small and medium-sized enterprises are always facing. As a result, relationship credit financing could play an important role in the financing of small and medium-sized enterprises.The main factors that affect the number of relationship lending include market competition, bank size, bank-enterprise distance and relevant government policies. In this paper, how competition of credit market affecting the relationship lending is studied. It is suggested that a non-monotonicity can be explained by looking at the organizational structure of local credit markets. While to compete in the market of small banks main components increase will make the bank increase the number of relationship lending. This difference is mainly due to the relationship and transactional lending income effect and substitution effect between affected by competitive level, caused by the different direction.In the empirical analysis section, with the loan data of small and medium-sized enterprises in China a result is concluded that an enterprise could not get more relational loans when there are more banks in market. In other words, the competition will produce negative effects on how much will an enterprise get from loan. To promote financing of small and medium-sized enterprises, the government should introduce competition as well as encouraging more medium sized or even small banks to participate in regional credit.