Does Transparency about Banks' Lending Costs Lower Firms' Borrowing Costs? Evidence from India

Journal of Accounting and Economics, 2024[10.1016/j.jacceco.2024.101737]

62 Pages Posted: 18 Sep 2024

See all articles by Prasanna L. Tantri

Prasanna L. Tantri

Indian School of Business

Nitin Vishen

Indian Institute of Management (IIMB), Bangalore - Finance & Accounting Department

Date Written: August 16, 2024

Abstract

We study the impact of transparency about banks' costs on loan interest rates. The Indian Central Bank required banks to disclose a cost-based benchmark interest rate instead of the prime rate. The banks could price loans using any spread to the cost-based benchmark. We find that this change, which made banks' cost structures more transparent, lowers the interest rates charged and leads to increases in debtor firms' total borrowings and investments. We hypothesize that increased cost transparency reveals relationship rents to competitor banks and makes it difficult for incumbent banks to maintain high relationship rents because of increased threat of entry.

Keywords: Bank Transparency, Benchmarks, prime rate, Bank Transparency, Cost-Based Benchmark Interest Rate, Prime Rate, Loan Interest Rates, Relationship Banking, Lending Costs, Borrowing Costs, Bank Competition, India, Reserve Bank of India, Credit Market Efficiency, Financial Regulation, Banking Sector, Interest Rate Transparency, Base Rate, Regulatory Impact, Credit Markets, Corporate Borrowing, Competition in Banking, Informational Rents

Suggested Citation

Tantri, Prasanna L. and Vishen, Nitin, Does Transparency about Banks' Lending Costs Lower Firms' Borrowing Costs? Evidence from India (August 16, 2024). Journal of Accounting and Economics, 2024[10.1016/j.jacceco.2024.101737], Available at SSRN: https://ssrn.com/abstract=4928041 or http://dx.doi.org/10.2139/ssrn.4928041

Prasanna L. Tantri

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India
9160099959 (Phone)

Nitin Vishen (Contact Author)

Indian Institute of Management (IIMB), Bangalore - Finance & Accounting Department ( email )

Bangalore, Karnataka
India

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