Are Foreign Banks Bad for Development Even If They Are Efficient? Evidence from the Indian Banking Industry

Sumon Bhaumik and Jenifer Piesse

William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: Most papers on banking focus on profitability and cost efficiency as measures of performance. In doing so, these papers ignore the fact that, unlike in the manufacturing and services sector industries, the long term viability of a bank depends more on its ability to assess credit worthiness of potential borrowers and provide credit, than on static measures of financial performance. At the same time, the political economy of economic growth and economic reforms cannot overlook the impact of ownership and reforms on credit infusion, which is a major determinant of economic growth. Specifically, there is widespread belief that while foreign banks are perhaps more efficient and profitable than domestic banks in emerging markets, these banks are content to ‘cherry pick’ and limit disbursal of loans. Using bank-level data from India, for six years (1995-96 to 2000-01), we show that given a favourable atmosphere involving economic reforms and banking sector liberalisation, as well as time needed to overcome the informational disadvantages vis a vis the domestic banks, foreign banks are willing to be aggressive in credit markets of emerging economies. The policy implication of our paper is that it provides a strong rationale for policy initiatives that encourages entry of foreign banks into emerging markets and the expansion of their activities in these economies.

Keywords: Indian banking; Development; Credit Market; Stochastic frontier analysis (search for similar items in EconPapers)
JEL-codes: G21 O16 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-10-01
New Economics Papers: this item is included in nep-cfn, nep-cwa, nep-dev and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp619.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp619.pdf [302 Found]--> https://wdi.umich.edu/files/Publications/WorkingPapers/wp619.pdf)

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:wdi:papers:2003-619

Access Statistics for this paper

More papers in William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109. Contact information at EDIRC.
Bibliographic data for series maintained by WDI ().