Is relationship lending still a mixed blessing? A review of advantages and disadvantages for lenders and borrowers

Relationship lending is a common lending technology that is assumed to bring several benefits to small-medium enterprises (SMEs) and to financial institutions that adopt it. Notably, it could reduce information asymmetries, permitting banks to offer better credit terms to the borrower. However, it also entails some costs for both sides. The empirical evidence so far has not been conclusive in determining under what conditions relationship lending can be beneficial or harmful. Most of the studies suggest that SMEs that engage in relationship lending benefit from more credit availability (especially during a financial crisis), and lower interest rates. This occurs when they are served by small banks, are geographically close to the lender, when the bank is adequately decentralized and when it is the dominant creditor of the firm. However, under certain circumstances, banks can extract rents from the borrower or be captured by him. In addition, the consequences and the future of relationship lending will be remarkably affected by the level of competition among banks, their ownership structure, the regulatory framework and the business model that banks will have to adopt accordingly.