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

Author

Listed:
  • Mrs. Poonam Gupta
  • Ms. Kalpana Kochhar
  • Mr. Sanjaya P 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.

Suggested Citation

  • Mrs. Poonam Gupta & Ms. Kalpana Kochhar & Mr. Sanjaya P Panth, 2011. "Bank Ownership and the Effects of Financial Liberalization: Evidence from India," IMF Working Papers 2011/050, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/050
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    References listed on IDEAS

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    5. Abdul Abiad & Enrica Detragiache & Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 281-302, June.
    6. Banerjee, Abhijit V. & Cole, Shawn & Duflo, Esther, 2005. "Banking Reform in India," India Policy Forum, National Council of Applied Economic Research, vol. 1(1), pages 277-332.
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    Citations

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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. Areendam Chanda & C. Justin Cook, 2019. "Who Gained from India's Demonetization? Insights from Satellites and Surveys," Departmental Working Papers 2019-06, Department of Economics, Louisiana State University.
    3. Bertay,Ata Can & Calice,Pietro & Diaz Kalan,Federico Alfonso & Masetti,Oliver, 2020. "Recent Trends in Bank Privatization," Policy Research Working Paper Series 9318, The World Bank.
    4. Steinkamp, Sven & Westermann, Frank, 2018. "Systemic crisis and growth revisited: Has the global financial crisis marked a new era ?," Economics Letters, Elsevier, vol. 170(C), pages 50-54.
    5. Barry Eichengreen & Poonam Gupta, 2013. "Exports of services: Indian experience in perspective," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 6(1), pages 35-60, April.
    6. Eichengreen, Barry & Gupta, Poonam, 2012. "The global financial crisis and indian banks: survival of the fittest?," MPRA Paper 43365, University Library of Munich, Germany.
    7. World Bank, "undated". "South Asia Economic Focus, Spring 2020," World Bank Publications - Reports 33478, The World Bank Group.
    8. 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.
    9. Sara Hsu, 2016. "China's Banking Sector as the Foundation of Financial Reform," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 3(2), pages 244-248, May.
    10. Maria Bas & Antoine Berthou, 2021. "Financial development, reallocation and growth: Firm heterogeneity matters," The World Economy, Wiley Blackwell, vol. 44(5), pages 1205-1231, May.
    11. Gupta, Poonam & Kumar, Utsav, 2010. "Performance of Indian Manufacturing in the Post Reform Period," MPRA Paper 24898, University Library of Munich, Germany.
    12. Sven Steinkamp & Frank Westermann, 2018. "Systemic Crisis and Growth Revisited: Has the Global Financial Crisis Marked a New Era?," CESifo Working Paper Series 7094, CESifo Group Munich.
    13. Brijesh K Mishra & L. V. Ramana, 2018. "Does Ownership Structure Influence Bank Performance?: Evidence from an Emerging Economy," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2_suppl), pages 282-297, August.
    14. Samman Hatem & Shahnawaz Sheikh, 2014. "Financial Services and the GATS in the GCC: Problems and Prospects," Review of Middle East Economics and Finance, De Gruyter, vol. 10(3), pages 1-24, December.

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    More about this item

    Keywords

    WP; bank; public bank; private bank; securities;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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