The Personal Side of Relationship Banking

41 Pages Posted: 20 Mar 2012  

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: March 15, 2012

Abstract

This paper documents a widely overlooked dimension of relationship lending: the personal interaction between the borrower and the lender reduces the willingness of the borrower to engage in moral hazard and default on the loan officer. We conduct a randomized experiment with small business borrowers of the largest commercial bank in India to test the impact of three different levels of interactions between the borrower and the bank. Borrowers who are regularly called either by a single assigned relationship manager or by one manager randomly selected from a small team of managers show much better repayment behavior and greater satisfaction with the bank services than borrowers who either receive no follow up or only receive follow up calls from the bank when they are delinquent. The results are economically and statistically significant: borrowers who receive the more intensive treatment see a large reduction in the number of late payment spells and delinquencies.

Keywords: banking, relationship lending, soft information

JEL Classification: G21

Suggested Citation

Schoar, Antoinette, The Personal Side of Relationship Banking (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024653 or http://dx.doi.org/10.2139/ssrn.2024653

Antoinette Schoar (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
United States
617-253-3763 (Phone)
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National Bureau of Economic Research (NBER) ( email )

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