Bank Incentive, Relationship Lending and Optimal Loan Interest Rate
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| Title | Bank Incentive, Relationship Lending and Optimal Loan Interest Rate
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| Author | Zhang Yilin and Fan Gangzhi |
| Organization | Southwestern University of Finance and Economics; Konkuk University |
| Email | ylzhangswufe@gmail.com；gzfan@swufe.edu.cn |
| Key Words | SMEs Financing; Uncertainty; Interest Rate Liberalization; Inclusive FinanceSMEs Financing; Uncertainty; Interest Rate Liberalization; Inclusive Finance |
| Abstract | We extend the continuous-finance model to explore the effect of profit uncertainty on bank financing decisions. We find that in a relationship lending under symmetric information, the bank’s risk comes from the uncertainty of the firm’s profit. A proper loan interest rate is key to the long-term cooperation between the firm and the bank. Although the financing cost decreases as the loan interest rate decreases, the firm can obtain a sustainable and inclusive financial support from the bank only if the loan rate matches its profit uncertainty. The optimal loan interest rate that maximizes the long-term profit of the firm should balance the financing cost and bank incentive. This paper provides new insights into the financing problem of small medium enterprises (SMEs) as well as the liberalization of interest rates. |
| Serial Number | WP876 |
| Time | 2015-05-19 |
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