To avoid credit rationing, banks use other methods to screen potential borrowers. 24 For example, banks can use extensive and comprehensive covenants on loans to mitigate agency costs. As new information arrives, covenants can be renegotiated. Covenants may also require collateral or personal guarantees from firms about their future activities and business practises in order to maximise the probability of repayment. The banks lending history produces valuable information that evolves over time. Banks therefore are depositories of information, which in itself becomes a valuable asset that allows banks to ascertain good borrowers from bad,.
