Is relationship lending still a mixed blessing? A review of advantages and disadvantages for lenders and borrowers

Relationship lending is one of the most important lending technologies adopted by banks and their borrowers. The adoption of relationship lending is mainly related to small business lending. This chapter analyses how the main determinants of relationship lending impact on benefits and costs for lenders and borrowers. It highlights how different financial systems - bank-based compared to market-based - could influence the opportunities for firms to receive a particular type of financing, modulating the financial intermediaries’ choice to employ relationship lending. The chapter focuses on the theoretical foundations of relationship lending, its main benefits and principal drawbacks. It illustrates the research framework and the analysis of the main determinants of relationship lending, presenting the benefits and costs of relationship lending for borrowers and lenders. The chapter also focuses on industry determinants affecting the adoption and outcomes of relationship lending.