Relationship Lending and Terms of Credit: Evidence from Firm-Level Data

Using new data from a bank-level and a firm-level survey of SMEs from Bangladesh, this paper tests whether relationship lending as proxied by the length of relationship and relationship bank status has a meaningful association with credit contract terms. The depth of the data allows this research to econometrically study whether the benefits of relationship lending outweigh its costs. The results indicate that relationship lending reduces interest rates by 7 and 46 basis points respectively and the probability of collateral requirement of firms. Further robustness test supports the results of the central analysis. Hence, developing close bank-firm ties is a good strategy for SMEs to manage the cost of obtaining finance.