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Banking Reforms, Access to Credit and Misallocation

Author

Listed:
  • Pavel Chakraborty

    (Department Of Economics, Management School, Lancaster University)

  • Nirvana Mitra

    (Department Of Economics, Shiv Nadar University)

Abstract

New liberalization policies are rapidly globalizing financial services in developing countries, but there is little or no microeconomic evidence on the impact of banking reforms on the real economy. We examine the impact of a banking sector reform, characterized by the introduction of new domestic private and/or foreign banks, on Indian manufacturing firms' access to credit, performance and the resulting misallocation in the Indian economy using a unique firm-bank matched data. We find that the introduction of new banks led to (i) increase in access to credit by 18|23% for big firms (top 25 percentile of size distribution); (ii) reduction in access to loans for small firms (bottom 25th percentile) by around 45%; and (iii) increase in profit, total sales for big firms. Next, we follow Hsieh and Klenow (2009) and estimate the distortions arising out of capital and output market and show that the banking reforms significantly relaxed the credit constraints only for the big and more productive firms, resulting in reduced capital market misallocation. Finally, our counterfactual experiment shows that the reallocation of credit led to an overall gain in manufacturing output by 0.15 - 1.1%.

Suggested Citation

  • Pavel Chakraborty & Nirvana Mitra, 2022. "Banking Reforms, Access to Credit and Misallocation," Working Papers 2022-01, Shiv Nadar University, Department of Economics.
  • Handle: RePEc:alr:wpaper:2022-01
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    References listed on IDEAS

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    More about this item

    Keywords

    Banking Reforms; Private and/or Foreign Banks; Big Firms; Cream Skimming; Misallocation.;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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