Asymmetric Information

Up to the mentioned before the SMEs sector suffered ‘credit rationing’ and was recognized by most of the market agents, now the next point to check is the ‘asymmetric information’ presence.

It is important to remember that a lack of information from the bank increases the risk perception of a particular customer.

Assuming the results found by Carter (2002) and other researchers, that ‘more information leads to a decrease in rates applied by the banks’, we couldn’t check in the Argentinean case the inverse hypothesis that is ‘the interest rates applied didn’t reduce because the lack of information’, but we’ll present some empirical data that supports the evidence of information problems in the Argentinean SMEs sector during the second half of the 90’s in order to obtain an idea of why credit was expensive and not accessible.

The study mentioned found that there were three main problems related with financing access with the following agreement in between the different agents: excess of collaterals (85%), high interest rates (81%) and deficient evaluation (57%) The case of high collateral requirements often occurs when the information about the company or the project is deficient so the banks use this instrument to cover potential looses, said in other words, the asymmetric information is intended to be reduced increasing the responsibility of the borrower. Increasing the information available the project is less risky then less collateral is required.

The high interest rates were consequence of the risk perception of the business. The sector indeed has higher dilatoriness rates than the rest of portfolios, nevertheless what is curious is that the rate didn’t decrease in the period probably because the information was constant or declining along the time. Following Carter’s position we would say that increasing the information available along the time would’ve encouraged the rates declining.

More directly connected with ‘asymmetric information’ problem is the evaluation deficiencies adduced. This is a direct evidence of ‘credit rationing’ due to lack of information quantity and quality.

Another circumstance, not mentioned by the SMEs but found as a result on some studies (FIEL, 1996; Yoguel, 1999), is that the size of the company was the unique influential characteristic in order to access credit, excluding the rest of factors like dynamism, belonging sector, external market business, location or age characteristics. This can be observed as a ‘rationing’ in which smaller companies are not being taken in consideration due to the costs needed to generate adequate information. In resume, we’ll say that every aspect of the ‘credit rationing’ factors, i.e. collateral requirements, interest rates, project/company evaluation, monitoring, ‘incentive effect’, variety of conditions, high mortality, can be positively affected thanks to an improvement in the information quality and quantity (diminishing ‘asymmetric information’).

As can be noticed we’ve related the main obstacles of financing with the ‘asymmetric information’ problem, the same process we’ve made at the beginning under a theoretical frame relating the main causes of credit rationing with the ‘asymmetric information’ one (Section ‘Credit rationing: Focusing in asymmetric information’).