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Bank lending to small business in India: Analyzing productivity and efficiency

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  • Ramcharran, Harri

Abstract

This study extends the literature of the performance of small and medium size industries (SME) by empirically estimating the efficiency of bank loans to the SME sector of India using data from 1979 to 2013. We use a production function methodology, specifically estimating a non-homogeneous production function which, unlike other specifications, provides time varying econometric estimates of productivity, this helps to detect the impact of policy changes on efficiency overtime. The theoretical rationale for this approach is the “money as an input in the production function” argument. The results have important policy implications regarding capital allocation and risk management since bank loans are the main source of financing SME. The results indicate increasing productivity (output elasticity) of bank credit from 0.76 to 1.23; the productivity of labor is negative, but increases from −1.57 to −0.628. The sector's efficiency improved from returns to scale of −0.89 to 0.607 mainly due to the increasing productivity of bank credit. The decrease in the number of “sick” units with large outstanding debt apparently contributes to this improvement. Current problems facing the banking sector could increase borrowing cost, decrease credit availability and thus the productivity of SME. Policies to improve the skills of workers and to reduce the number of sick units are important for improving efficiency.

Suggested Citation

  • Ramcharran, Harri, 2017. "Bank lending to small business in India: Analyzing productivity and efficiency," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 16-24.
  • Handle: RePEc:eee:quaeco:v:65:y:2017:i:c:p:16-24
    DOI: 10.1016/j.qref.2016.06.003
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    Cited by:

    1. Christopher Boudreaux & George Clarke & Anand Jha, 2021. "Social capital and small business productivity: The mediating roles of financing and customer relationships," Papers 2104.12004, arXiv.org.
    2. Ansita Aggarwal & Satya Ranjan Acharya, 2019. "Choosing Equity As A Source Of Finance: Perception Of Sme Promoters," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 8(4), pages 27-46.
    3. Christopher Boudreaux & George Clarke & Anand Jha, 2022. "Social capital and small informal business productivity: the mediating roles of financing and customer relationships," Small Business Economics, Springer, vol. 59(3), pages 955-976, October.
    4. Hacievliyagil Nuri & Eksi Ibrahim Halil, 2019. "A Micro Based Study on Bank Credit and Economic Growth: Manufacturing Sub-Sectors Analysis," South East European Journal of Economics and Business, Sciendo, vol. 14(1), pages 72-91, June.
    5. P.V. Viswanath, 2021. "Connectivity and Savings Propensity among Odisha Tribals," Sustainability, MDPI, vol. 13(2), pages 1-15, January.
    6. Iuliia S. Pinkovetskaia & Igor V. Balynin, 2018. "Structure of Small and Medium-Sized Business- Results of Total Statistic Observations in Russia," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 14(1), pages 143-158.

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    More about this item

    Keywords

    Bank loan; Small scale industry; Production efficiency; Returns to scale;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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