“Credit Guarantees and New Bank Relationships”

Abstract:

Credit guarantee schemes for bank loans are at the heart of most Governments’ strategies to help firms, and often direct vast volumes of credit. This paper examines Chile’s credit guarantee scheme for bank loans to small and medium enterprises (SMEs), which is structured like many OECD countries’ schemes. We use a regression discontinuity around the eligibility cutoff and find that this credit guarantee design generates large positive effects on firms’ total borrowing without large increases in default rates. The scheme also has an amplification effect: firms increase borrowing from other banks in the eighteen months following a loan guarantee. Moreover, we show that the guarantees are used to build new bank relationships, an important process for SMEs. Finally, we show that firms use the credit increase to significantly scale up their sales, employment and input purchases. These results provide evidence that credit guarantees are an effective policy tool for both boosting credit availability, and for establishing new bank relationships for SMEs.