A Comparison of the Lending Technologies between Private and Public Banks

Using very unique data on loan screening by a large public bank and private banks in Japan, this paper empirically compares the lending technologies used for lending to small- and medium-sized enterprises between the two types of banks. We find that the public bank uses financial statement lending, but does not extensively use relationship lending or lending based on collateral or guarantee. These findings are in sharp contrast with those for private banks that extensively use all three types of lending technologies. We also find less frequent visits by loan officers at the public bank to, and the bank's greater geographic distance from, its borrowers, which may contribute to the public bank's less extensive screening. However, we also find uniqueness in the public bank's loan screening in the form of its greater emphasis on borrowers' business plans and on-site visits to borrowers' establishments.