SOFT INFORMATION PRODUCTION IN SME LENDING

We analyze the determinants of soft information production on bank clients assuming that this information is collected through close contact with borrowers. After classifying contacts based on the initiator and the location of the lender–borrower meetings, we find that banks have more direct contact with firms characterized by low risk and low use of their banking products, indicating that there may also be commercial reasons for such contact. Our findings suggest that the production of soft information may follow a quality selection process in which banks prefer to strengthen relationships with clients characterized by low risk and low use of their products. We provide additional evidence of the role of soft information in ongoing interactions between banks and borrowers. Banks that initiate contacts at the firm location result in future lower risk, lower spreads, and increased product sales.