BANKING CONCENTRATION AND CREDIT RESTRICTION FOR MICRO AND SMALL BUSINESSES IN BRAZIL
Banking Concentration; Micro and Small Firms; Local Credit; Efficiency; Distance
The objective of this paper is to analyze the effect of the concentration pattern of the banking system at the local level on the credit conditions and profitability of micro and small companies in Brazil. A portion of the finance literature indicates that the banking monopoly increases credit restrictions for smaller firms. However, the literature on the creditor-debtor relationship indicates that large financial corporations improve credit conditions for these firms. Thus, there is no consensus among researchers about the impacts of monopoly power on access to credit. However, banking concentration and regional heterogeneity in Brazil favor the analysis of the effects of monopoly power on firms’ credit conditions at the municipal level. A wide database made available by public institutions in Brazil enabled the construction of data at the local level. Microdata is formed by the set of information from the banking, legal, regional accounts and micro and small companies from 1995 to 2017. In addition to the database, the quantitative analysis is divided into three stages. The first examined whether the monopoly power of banks has an impact on the credit conditions and profitability of micro and small businesses. The results of this estimation pointed to greater credit rationing for these firms. In light of this evidence, the second stage is observed because banks do not ease credit restrictions in view of the sector’s monopoly power. The work analyzed as hypotheses of efficiency in the banking and legal sector. Indicators signaled inefficiency indices for both the banking and legal sectors. Thus, these favorable results that levels of physical and legal efficiency reduce as a credit restriction for micro and small companies. However, bank cost inefficiency levels can be correlated with spatial characteristics. The regional literature indicates that the physical distance between the institutions’ headquarters and branches generates agency costs. Therefore, the results of the third stage show that the increase in distance between the main municipality and bank branches increases credit costs for micro and small businesses. Therefore, the easing of credit conditions in Brazil depends on increased competition between banks combined with the development of the banking market at the regional level and the improvement in the efficiency levels of the legal sector.