Only the brave: improving self-rationing efficiency among discouraged Swiss SMEs

We conduct a survey among 1922 Swiss SMEs to analyze their access to bank loans. Credit-constrained SMEs are six times more likely to be discouraged than rejected. The most dominant reasons for being discouraged are too high collateral requirements, cumbersome application procedure, and the expectation of being turned down. Through a unique feature in the Swiss banking market, we also find new evidence for the importance of a strong firm–bank relationship. We challenge the assumption that discouraged borrowers are very similar to rejected borrowers. Our results indicate that the group of discouraged borrowers is more similar to the denied borrowers than to the group of approved borrowers, but only with respect to firm characteristics. For variables describing business development and firm–bank relationship, discouraged SMEs have less in common with credit-constrained firms than with their unconstrained counterparts. Even with a conservative prediction, about 60% of the discouraged firms would have obtained a bank loan if they had applied for one. The self-rationing mechanism observed is thus rather inefficient, and banks and policy makers should think about how to foster SMEs’ courage to apply for the bank loans they need.