Small business customers at the nation’s 18 largest banks reported less success getting credit than customers of other commercial banks, according to a report released today by researchers at the National Federation of Independent Business conducted by Gallup.
One likely explanation for the difference: Big banks rely on automated credit scoring to make loan decisions, while smaller banks rely on relationships and more labor-intensive credit analysis, says Bob Seiwert, senior vice president of the American Bankers Association Center for Commercial Lending and Business Banking. The group represents banks of all sizes in Washington.
Less than 30% of small businesses that bank at the 18 largest institutions reported having their credit needs met in 2009, compared to 50% at other banks, according to the survey, which sampled 750 employer firms with fewer than 250 workers. “It appears that the nation’s largest banks have not filled the credit needs of their small business customers nearly as well as smaller institutions have filled the needs of theirs,” the NFIB report says.
Smaller banks, where loan officers have relationships with customers and personal knowledge of their businesses, are more likely to make loans that large banks’ credit scoring models reject. “Credit scoring uses statistical techniques to determine the probability that a borrower will repay a loan or won’t repay a loan,” based on the applicant’s industry, location, and credit history, Seiwert says. “It doesn’t analyze the cash-flow generating capability of the borrower’s specific loan request.”
He says some larger banks, like JPMorgan Chase, are now giving rejected loans “second looks” when borrowers ask, and they sometimes make loans to applicants their scoring models rejected initially. (Seiwert, a former community bank president, also used to work at JPMorgan Chase.)
It’s hard not to conclude that shifting to old-fashioned relationship lending would allow banks to find more credit-worthy small business customers. (That’s what Huntington National Bank wants to do.) But that’s expensive. Automated scoring has advantages for borrowers as well: they get quick credit decisions, and those who qualify can often get loans at lower cost, Seiwert says.
Of course, the financial crisis and subsequent pressure from regulators to reduce their risk may have disproportionately kept large banks cautious as well. “A number of the larger banks were really affected, which impacted their ability to lend,” Seiwert says.
The NFIB report also repeated some familiar points: weak sales are a bigger problem for most small businesses than access to credit, and falling real estate values hurt businesses’ ability to borrow. More coverage from the Washington Post.