How can specializing in lending help to reduce the adverse selection p

How can specializing in lending help to reduce the adverse selection problem in lending?

What will be an ideal response?

ANSWER

Reducing the adverse selection problem requires the banks to acquire information to screen bad credit risks from good credit risks. It is easier for banks to obtain information about local businesses. Also if the bank lends to firms in a few specific industries they will become more knowledgeable about those industries and a better judge of creditworthiness in those industries.