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Bank Ownership and the Effects of Financial Liberalization: Evidence from India

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Author Info

  • Poonam Gupta
  • Kalpana Kochhar
  • Sanjaya Panth

Abstract

Do financial sector reforms necessarily result in expansion of credit to the private sector? How does bank ownership affect the availability of credit to the private sector? Empirical evidence is somewhat mixed on these issues. We use the Indian experience with liberalization of the financial sector to inform this debate. Using bank-level data from 1991-2007, we ask whether public and private banks deployed resources freed up by reduced state preemption to increase credit to the private sector. We find that even after liberalization, public banks allocated a larger share of their assets to government securities than did private banks. Crucially, we also find that public banks were more responsive in allocating relatively more resources to finance the fiscal deficit even during periods when state pre-emption (measured in terms of the requirement to hold government securities as a share of assets) formally declined. These findings suggest that in developing countries, where alternative channels of financing may be limited, government ownership of banks, combined with high fiscal deficits, may limit the gains from financial liberalization.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/50.

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Length: 45
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/50

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Related research

Keywords: Credit; Banks; Credit expansion; Financial sector;

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References

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  1. Arturo Galindo & Fabio Schiantarelli & Andrew Weiss, 2005. "Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries," Boston College Working Papers in Economics 625, Boston College Department of Economics.
  2. Abhijit V. Banerjee & Shawn Cole & Esther Duflo, 2004. "Banking Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 1(1), pages 277-332.
  3. Hauner, David, 2008. "Credit to government and banking sector performance," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1499-1507, August.
  4. Enrica Detragiache & Abdul Abiad & Thierry Tressel, 2008. "A New Database of Financial Reforms," IMF Working Papers 08/266, International Monetary Fund.
  5. Hauner, David, 2009. "Public debt and financial development," Journal of Development Economics, Elsevier, vol. 88(1), pages 171-183, January.
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Cited by:
  1. Eichengreen, Barry & Gupta, Poonam, 2013. "The financial crisis and Indian banks: Survival of the fittest?," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 138-152.
  2. Eichengreen, Barry & Gupta, Poonam, 2012. "The global financial crisis and indian banks: survival of the fittest?," MPRA Paper 43365, University Library of Munich, Germany.
  3. Eichengreen, Barry & Gupta, Poonam, 2012. "Exports of Services: Indian Experience in Perspective," Working Papers 12/102, National Institute of Public Finance and Policy.
  4. Gupta, Poonam & Kumar, Utsav, 2010. "Performance of Indian Manufacturing in the Post Reform Period," MPRA Paper 24898, University Library of Munich, Germany.
  5. Lee, Chien-Chiang & Hsieh, Meng-Fen, 2014. "Bank reforms, foreign ownership, and financial stability," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 204-224.

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