(An Autonomous Apex Institute Established by RBI & Banks)
(An Autonomous Apex Institute Established by RBI & Banks)
Paper Number :WP/14/2022
Publication Date :April 5, 2022
Much of the literature on banking focuses on the value of relationship loans to lowquality firms. However, we show that under private information and incomplete contracts, bank-firm matching may be positively assortative. If the costs of monitoring a low quality borrower are higher than the subsequent gain from pairing with it, banks may prefer higher types. The result is reinforced if relationship specific investments and loan recovery rates are noncontractible.