State-owned banks and credit allocation in India: Evidence from an asset quality review

Abhiman Das, Sanket Mohapatra and Akshita Nigania

IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: This paper examines the role of state-owned banks’ presence in allocation of credit to different sectors in India using the central bank's Asset Quality Review (AQR) as a quasi-natural experiment. The AQR resulted in a larger increase in non-performing loans of state-owned banks as compared to other banks. We exploit the heterogeneity in the presence of state-owned and other banks across districts to identify the supply side channels for bank credit reallocation. Using a difference-in-differences analysis, we find that the top-third of districts based on presence of state-owned banks' branches experienced a higher fall in the share of credit to the industrial sector in the post-AQR period compared to other districts. Such districts also experienced a greater increase in retail loans, which are considered less risky compared to industrial loans. Further, an analysis using a panel vector autoregression finds that the AQR, through an increase in non-performing loans of state-owned banks, led to a decrease in economic growth at the district-level. The results of this study suggest that central bank policy reforms can influence bank credit allocation at the sub national level and have real economy effects.

Date: 2022-02-23
New Economics Papers: this item is included in nep-ban, nep-cwa and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:iim:iimawp:14671

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