Who Needs Credit and Who Gets Credit in Eastern Europe?

European Banking Center Discussion Paper No. 2010-14

CentER Discussion Paper Series No. 2010-50

Posted: 25 May 2010

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Alexander A. Popov

European Central Bank (ECB)

Pinar Yesin

Swiss National Bank

Multiple version iconThere are 2 versions of this paper

Date Written: May 17, 2010

Abstract

Based on survey data covering 8,387 firms in 20 countries we compare credit demand and credit supply for firms in Eastern Europe to those for firms in selected Western European countries. We find that, while 30% of firms do not need credit in Eastern Europe, their need for credit is higher than in Western Europe. The firm-level determinants of credit needs in Eastern Europe are quite similar to that in Western Europe: Firms with alternative financing sources, i.e., government-owned, foreign-owned and internally-financed firms, are less likely to need credit. Small firms are also less likely to demand credit than larger firms, suggesting that they may have limited investment opportunities. We find that a higher share of firms is discouraged from applying for a loan in Eastern Europe than in Western Europe. Firms in Eastern Europe seem particularly discouraged by high interest rates compared to firms in Western Europe, with collateral conditions and loan application procedures also more discouraging. The higher rate of discouraged firms in Eastern Europe is related to a stronger reluctance of small and financially opaque firms to apply for a loan compared to Western Europe. While many discouraged firms correctly anticipate that their loan applications would be rejected, a large majority of discouraged firms seem to be creditworthy. At the country-level we find that the higher rate of discouraged firms in Eastern Europe is driven more by the presence of foreign banks than by the macroeconomic environment or the lack of creditor protection. We find no evidence that foreign bank presence leads to stricter loan approval decisions. Our findings suggest to policy makers that the low incidence of bank credit among firms in Eastern Europe, compared to Western Europe, is not driven by less need for credit or banks’ reluctance to extend loans. The main driver seems to be that many (creditworthy) firms are discouraged from applying for a loan, due to high interest rates, collateral conditions and cumbersome lending procedures. As discouragement is particularly high among small and opaque firms, as well as in countries with a strong presence of foreign banks, it seems that firms perceive lending standards to have become more reliant on hard information with the entry of foreign banks. However, as loan rejection rates are not related to foreign bank presence, it seems that firms’ perceptions of the likely lending conditions may be too pessimistic. Thus more transparency about credit eligibility and conditions may improve credit access, particularly in countries with a high presence of foreign banks.

Keywords: Credit Constraints, Banking Sector, Transition Economies

JEL Classification: G21, G30, F34

Suggested Citation

Brown, Martin and Ongena, Steven R. G. and Popov, Alexander A. and Yeşin, Pınar, Who Needs Credit and Who Gets Credit in Eastern Europe? (May 17, 2010). CentER Discussion Paper Series No. 2010-50. Available at SSRN: https://ssrn.com/abstract=1615476 or http://dx.doi.org/10.2139/ssrn.1615476

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alexander A. Popov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pınar Yeşin

Swiss National Bank ( email )

Boersenstrasse 15, P.O.Box
Zuerich, CH-8022
Switzerland
41-58-631-3969 (Phone)

HOME PAGE: http://www.pinaryesin.com

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