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Directed credit, financial development and financial structure: theory and evidence

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  • Debkumar Chakrabarti
  • Pradeepta Sethi
  • Sankalpa Bhattacharjee

Abstract

The recent initiative of the RBI in reviving the policy of directed credit allocation in a period dominated by the neoliberal philosophy necessitates reconsideration of the role of policy-directed credit allocation process on financial development and financial structure of firms. Introducing certain policy parameters, the paper attempts to model how financial development-financial structure interlinkage is influenced by the liberalization policies of the government. The theoretical construct is empirically verified using both aggregated and disaggregated (firm-level) data comprising a panel of 932 Indian manufacturing firms. Findings reveal that following the liberalization measures in the early 1990s, there has been a structural shift in the debt–equity ratio of firms, with equity market activities assuming prominence over time. As regards financial development, it has been observed that the withdrawal of DFIs specialized in term-lending activities in the early 2000s led to a significant increase in the degree of financing constraints faced by the manufacturing firms. This contradicts the basic premise of financial liberalization. The paper argues that under certain conditions, government intervention in the form of directed credit programmes would not only act as an effective instrument in ushering financial development, but also provide important guidelines in ensuring sustainability of institutions.

Suggested Citation

  • Debkumar Chakrabarti & Pradeepta Sethi & Sankalpa Bhattacharjee, 2019. "Directed credit, financial development and financial structure: theory and evidence," Applied Economics, Taylor & Francis Journals, vol. 51(16), pages 1711-1729, April.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:16:p:1711-1729
    DOI: 10.1080/00036846.2018.1528338
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    Cited by:

    1. Qin Lu & Zongyi Zhang, 2022. "Do Financial Support Policies Catalyse the Development of New Consumption Field?—Evidence from China’s New Consumer Enterprises," Sustainability, MDPI, vol. 14(20), pages 1-23, October.
    2. Guo-Hua Cao & Jing Zhang, 2021. "Is a sustainable loop of economy and entrepreneurial ecosystem possible? a structural perspective," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(5), pages 7002-7040, May.

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