Relationship Banking and the Credit Market in India

Dilip M. Nachane and Puttu Prasad ()
Additional contact information
Dilip M. Nachane: Dilip M. Nachane (the communicating author) is Director, Indira Gandhi Institute of Development Research (IGIDR), Gen. Arun Kumar Vaidya Marg, Goregaon (East), Mumbai 400065. Tel.: 91-22-28416501/66, Fax: 91-22-28402752/2026; e-mail: nachane@igidr.ac.in

Margin: The Journal of Applied Economic Research, 2010, vol. 4, issue 1, 1-23

Abstract: Relationship banking based on Okun’s ‘customer credit markets’ has important implications for monetary policy via the credit transmission channel. Studies of less-developed country (LDC) credit markets from this point of view seem to be scanty and this article attempts to address this lacuna. Relationship banking implies short-term dis-equilibrium in credit markets, suggesting the vector error-correction model (VECM) as an appropriate framework for analysis. We develop VECM models in the Indian context (for the period April 1992–December 2008 using monthly data) to analyse salient features of the credit market. An analysis of the error-correction mechanisms (ECMs ) reveals that disequilibrium in the Indian credit market is adjusted via demand responses rather than supply responses, which are in accordance with the customer view of credit markets. Further light on the working of the model is obtained through ‘generalised’ impulse responses and ‘generalised’ error decompositions (both of which are independent of the variable ordering). Our conclusions point towards firms using short-term credit as a liquidity buffer. This fact, together with the gradual adjustment exhibited by the ‘persistence profiles’ provides substantive evidence in favour of ‘customer credit markets’.

Keywords: Customer Credit Markets; Monetary Policy; Cointegration; Impulse Response; Persistence Profiles; JEL Classification: C32; JEL Classification: E51 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/097380100900400101 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:4:y:2010:i:1:p:1-23

DOI: 10.1177/097380100900400101

Access Statistics for this article

More articles in Margin: The Journal of Applied Economic Research from National Council of Applied Economic Research
Bibliographic data for series maintained by SAGE Publications ().