Bank Size and SME Lending: Evidences from China

Abstract: Using panel data collected in 2005, we evaluate how bank size, discretion over credit, incentive schemes, competition, and the institutional environment affect lending to small-and medium-sized enterprises in China. We deal with the endogeneity problem using instrumental variables, and a reduced-form approach is also applied to allow for weak instruments in estimation. We find that total bank asset is an insignificant factor for banks' decision on small-and medium-enterprise (SME) lending, but more local lending authority, more competition, carefully designed incentive schemes, and stronger law enforcement encourage commercial banks to lend to SMEs.

Keywords: SME lending, bank size, loan approval rights, reduced-form approach, soft information

Bank Size and SME Lending Evidences from China.pdf