BANK LENDING DURING THE TRANSITION PERIOD IN EASTERN-EUROPE

This paper develops a model for bank lending in economies in transitio n. Many loans in the bank's portfolio are non-performing as former sta te-owned companies are still to be restructured and therefore at least in the short-run short of cash-flow to service their loans. The bank now faces the following dilemma: should it terminate the loan irrespec tive of the future profitability thereby pushing the company into bank ruptcy or should it extend its credit facilities thereby risking throw ing good money after bad? This paper will argue that the bank should s upport a firm willing to undergo sufficient restructuring by extending existing credit facilities. On the other hand, the bank should initia te bankruptcy procedures against firms unwilling to undergo restructur ing. The analysis is confined to small and medium-sized enterprises as large firms frequently get implicit or explicit government support.