Banking Reforms, Access to Credit, and Misallocation

Pavel Chakraborty and Nirvana Mitra

MPRA Paper from University Library of Munich, Germany

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 the 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%.

Keywords: Banking Reforms; Private and/or Foreign Banks; Big Firms; Cream Skimming; Misallocation (search for similar items in EconPapers)
JEL-codes: G1 G21 L25 O47 (search for similar items in EconPapers)
Date: 2021-02-15
New Economics Papers: this item is included in nep-eff and nep-fdg
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