How Digital Infrastructure Transforms Bank Lending in Crises
The COVID-19 pandemic brought unprecedented financial stress, especially to small businesses. To alleviate liquidity constraints, many governments introduced loan guarantees, and Italy's Fondo di Garanzia (FG) became a vital part of this effort. A recent paper published by Management Science, “Information Technology and Credit: Evidence from Public Guarantees” by Filippo De Marco of Bocconi’s department of Finance and Fabrizio Core of Erasmus University Rotterdam, explores how advancements in bank IT systems influenced the effectiveness of this program during the pandemic.
Despite expectations that digital lending could break down geographic barriers, the study reveals that lending to small businesses remains highly local. However, banks with better IT systems did manage to lend more efficiently and reach borrowers outside their branch networks, showing the potential of technology to enhance credit access.
IT improves loan access but proximity still rules
The paper looks at the performance of Italian banks during the pandemic, focusing on the delivery of guaranteed loans to small businesses. Even though loan applications were processed online and guaranteed by the government, the research shows that most lending occurred close to a bank's physical branches. The authors found that 50% of loans were issued within 1 kilometer of a bank branch, and 90% within 10 kilometers. Yet, banks with better IT systems stood out. They issued 25% more loans, charged 14-24% lower interest rates, and processed loans twice as fast compared to banks with weaker IT infrastructure.
This improved efficiency was particularly critical in reaching borrowers outside traditional markets. The authors found that banks with high IT capabilities were 30% more likely to lend in provinces without a branch than banks with less advanced IT systems. This demonstrates the importance of technology in expanding the reach of financial institutions, especially during a crisis.
The Italian public guarantee program
Italy’s government-backed guarantee program offered loans of up to €5 million to small businesses, with the state absorbing most of the credit risk. Banks were required to perform minimal credit screening, creating an ideal test case to study whether technology could replace local branch networks.
The study draws on loan-level data from the Italian FG, examining how bank features, particularly IT quality, affected loan distribution. Despite the possibility for entirely digital lending, the research highlights that existing banking relationships and local proximity still played a major role in loan allocation. Even businesses with no prior debt history tended to choose local banks, suggesting that familiarity and peer networks influenced their decisions.
IT’s role in expanding access
The study underlines the pivotal role that IT systems played in improving loan processing times. During the pandemic, most loan applications were submitted online, and banks with better-rated digital platforms disbursed funds significantly faster than their competitors. According to the study, these banks processed loans 4-8 days earlier, which was critical as small businesses faced severe cash flow shortages during the pandemic.
In addition, banks with stronger IT systems were better able to serve first-time borrowers, particularly in regions where they lacked physical branches. The research shows that digital infrastructure helped these banks bridge the gap in areas traditionally underserved by the banking sector, demonstrating the potential for IT to overcome geographic limitations.
Technology enhances, but doesn't replace, local lending
While digital infrastructure significantly improves efficiency and reach, small business lending remains predominantly local, even during a crisis when digital channels are widely available. Banks with better IT can expand access to credit, but physical proximity and pre-existing relationships continue to play an important role.
This research underscores the need for future public lending programs to account for the technological readiness of banks. The authors suggest that IT infrastructure is key to efficiently distributing public funds, but it complements rather than replaces the importance of local banking networks.
