Foreigners vs. Natives: Bank Lending Technologies and Loan Pricing

Abstract: Do domestic and foreign banks differ in their lending techniques and loan pricing models? Are such differences driven by different clienteles? Using a sample of firms that borrow from both domestic and foreign banks in the same month, we show significant differences in lending techniques and loan pricing. Foreign banks charge lower interest rates, but grant loans at a shorter maturity and are more likely to demand collateral than domestic banks. Foreign banks also base their pricing on credit ratings and collateral pledges, while domestic banks price according to length, depth and breadth of the relationship with the borrower. These findings confirm that foreign and domestic banks can cater to the same clientele but with different lending techniques: foreign banks with transaction-based and domestic banks with relationship-based lending techniques.