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

Abstract

Increasing globalization results in that companies are becoming more rootless and complex. In this highly evolving global environment. The majority of Swedish small and medium-sized enterprises (SMEs) are in need of borrowed capital from banks to expand and develop, which consequently requires a great skill from banks to evaluate the loan applicant's repayment ability. At the same time, the Swedish banking sector is characterized out of consolidation and reduction of bank branches. This results in that the distance between lenders and borrowers is increasing all the time as banks systematically replace the physical contact they previously had with their corporate clients, with information technology solutions. With this in mind, I believe it is interesting to examine what factors banks are actually looking at and assessing when lending to SMEs. Subsequently I will analyze if the information in the future could possibly be obtained solely from a distance. A major concern involves whether assessment from a distance leads to the same accuracy in the credit decisions, which historically has been accomplished by geographical proximity. If not, the supply of lending capital to SMEs might be jeopardized. The study examines the process of credit management in Handelsbanken. The bank still emphasizing the Church Tower Principle, meaning that the Handelsbanken should be able to look out over their customers, which requires geographical proximity. By analyzing why Handelsbanken still emphasizes the local presence, this study contributes to a better understanding of the relevance of geographical proximity between borrowers and lenders. The study comes to the conclusion that increased distance leads to higher risk-taking by Handelsbanken, 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 possible credit. However, the essay does not conclude that the increased distance and risk leads to a reduction of all banks supply of lending capital available to small and medium-sized businesses, as the essay is written from one bank's approach and thus, the statement becomes difficult to generalize.