Information from Relationship Lending: Evidence from Loan Defaults in China

Abstract

Using a proprietary database from a large Chinese state-owned bank, we examine whether information evolved from banking relationships predicts commercial loan default by industrial firms. We find that the bank’s relationship information is significantly linked to the incidence of default, and that its contribution to prediction accuracy is larger than any hard information. Furthermore, the effect of relationship information is stronger among firms that have a more sustained banking relationship. Our findings indicate that, at least in the emerging markets, a bank’s relationship information still matters for large firms, despite that fact that hard information for such firms is abundant.

Keywords: Debt default, internal credit ratings, credit risk, relationship lending, soft information

JEL Classification: G21, D81, D82, D83, F34