The Role of Banks’ Lending Standards in Determining Creditworthiness of Firms: Evidence from Turkish Banks

Year 2025, Volume: 17 Issue: 1, 29 - 43, 03.08.2025

Selman Dal , Seyid Mahmud

https://doi.org/10.33818/ier.1659420

Abstract

This study investigates the interplay between bank lending standards and credit scoring behavior of Turkish banks to SMEs. A Logistic Regression Model has been used by employing CBRT bank and firm-level micro data for the 2017Q1 – 2024Q2 period. First, one of the primary findings of the study shows that eased lending standards supported by excess liquidity conditions of banks significantly contributes to increasing probability of getting a better credit score. Second, we find that this relationship is stronger with the public banks as compared to private banks. Third, the results show that one of the important determinants of the probability of better credit score in addition to lending standards is the ‘spread’ between CBRT Average Funding Rate and Fed Funds Rate. A number of recent studies have shown that the presence of higher dependence on volatile capital flows in emerging markets may compromise the effectiveness of domestic monetary policy in ensuring financial stability. Third, during 2018 currency crisis, banks seem to adopt more risk-averse lending strategies. Finally, firm-level analysis suggests that banks tend to give higher scores to relatively larger firms during eased lending standards.

Keywords

Banks’ Lending Standards , Credit Score , Logistic Regression , SMEs

Ethical Statement

I hereby declare that all information in this document has been obtained and presented in accordance with the academic rules and ethical conduct. I also declare that, as required by these rules and conduct, I have fully cited and referenced all material and results that are not original to this work

Thanks

I wish to thank Syed Amjad Ali, Phd from Bilkent University his valuable support throughout our study period.

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