Does distance matter when banks lend to SMEs? A Case Study of Handelsbanken AB, in the importance of Geographical Proximity in Credit Management by Banks

University essay from Göteborgs universitet/Företagsekonomiska institutionen

Author: Fredrik Ohlsson; [2010-07-02]

Keywords: ;

Abstract: Increasing globalization results in that companies are becoming more rootless and complex. Inthis highly evolving global environment. The majority of Swedish small and medium-sizedenterprises (SMEs) are in need of borrowed capital from banks to expand and develop, whichconsequently requires a great skill from banks to evaluate the loan applicant's repaymentability. At the same time, the Swedish banking sector is characterized out of consolidation andreduction of bank branches. This results in that the distance between lenders and borrowers isincreasing all the time as banks systematically replace the physical contact they previously hadwith their corporate clients, with information technology solutions.With this in mind, I believe it is interesting to examine what factors banks are actually lookingat and assessing when lending to SMEs. Subsequently I will analyze if the information in thefuture could possibly be obtained solely from a distance. A major concern involves whetherassessment from a distance leads to the same accuracy in the credit decisions, whichhistorically has been accomplished by geographical proximity. If not, the supply of lendingcapital to SMEs might be jeopardized.The study examines the process of credit management in Handelsbanken. The bank stillemphasizing the Church Tower Principle, meaning that the Handelsbanken should be able tolook out over their customers, which requires geographical proximity. By analyzing whyHandelsbanken still emphasizes the local presence, this study contributes to a betterunderstanding of the relevance of geographical proximity between borrowers and lenders.The study comes to the conclusion that increased distance leads to higher risk-taking byHandelsbanken, and hence, worsen loan terms or even leads to rejections of loan applications,as it becomes more difficult for the bank to verify the information analyzed for a possiblecredit. However, the essay does not conclude that the increased distance and risk leads to areduction of all banks supply of lending capital available to small and medium-sizedbusinesses, as the essay is written from one bank's approach and thus, the statement becomesdifficult to generalize.

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