Connected Lending: Thailand before the Financial Crisis*

Abstract

The allocation of credit by banks and financial institutions on 'soft' terms to friends and relatives rather than on the basis of 'hard' market criteria in the years leading up to the East Asian crisis of 1997-98 has been widely noted.Using a detailed dataset on Thai firms prior to the crisis period we examine whether business connections were in fact a good predictor of preferential access to long term bank credit.We find that firms with connections to banks and politicians had greater access to long-term debt than firms without such ties.Connected firms need much less collateral to obtain long term loans than those without connections.Such firms obtain more long term loans, and appear to use less short term loans.We do not find support for the existence of connections between banks and firms serving to reduce asymmetric information problems.Our results thus lend support to the hypothesis that the presence of connections was the most important factor determining access to long term bank debt prior to the financial crisis and are consistent with recent research implicating weak corporate governance in the extent and severity of the crisis.