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The Impact of Directed Lending Programs on the Credit Access of Small Businesses in India: A Firm-level Study

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  • Kale, Deeksha

Abstract

This paper studies the impact of a policy package aimed at increasing access to bank credit of small firms at the national level in India. In 2006, the Government of India expanded the pool of small firms eligible for directed credit under a nation-wide credit program, by changing the criterion that determined the small business status of firms across all industries. Exploiting the expansion in the pool of small firms eligible for directed lending, I analyze the crowding out of previously eligible firms by recently eligible firms. I also study the growth in credit experienced by small firms from sources other than bank credit. I find that recently eligible firms not only disproportionately increased their bank credit stock relative to previously eligible firms, but also increased borrowings from other sources of credit. In other words, I find no evidence of substitution of other forms of credit with bank loans for recently eligible firms.

Suggested Citation

  • Kale, Deeksha, 2016. "The Impact of Directed Lending Programs on the Credit Access of Small Businesses in India: A Firm-level Study," MPRA Paper 72510, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:72510
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    References listed on IDEAS

    as
    1. Shawn Cole, 2009. "Fixing Market Failures or Fixing Elections? Agricultural Credit in India," American Economic Journal: Applied Economics, American Economic Association, vol. 1(1), pages 219-250, January.
    2. Blandina Oliveira & Adelino Fortunato, 2006. "Firm Growth and Liquidity Constraints: A Dynamic Analysis," Small Business Economics, Springer, vol. 27(2), pages 139-156, October.
    3. Philippe Aghion & Thibault Fally & Stefano Scarpetta, 2007. "Credit constraints as a barrier to the entry and post-entry growth of firms," PSE-Ecole d'économie de Paris (Postprint) hal-00813557, HAL.
    4. Abhijit V. Banerjee & Esther Duflo, 2014. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 572-607.
    5. Zia, Bilal H., 2008. "Export incentives, financial constraints, and the (mis)allocation of credit: Micro-level evidence from subsidized export loans," Journal of Financial Economics, Elsevier, vol. 87(2), pages 498-527, February.
    6. Scarpetta, Stefano & Fally, Thibault & Aghion, Philippe, 2007. "Credit Constraints as a Barrier to the Entry and Post-Entry Growth of Firms," Scholarly Articles 4554208, Harvard University Department of Economics.
    7. Thorsten Beck & Asli Demirgüç‐Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, February.
    8. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
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    More about this item

    Keywords

    Banking; Government Policy; Credit Access;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G2 - Financial Economics - - Financial Institutions and Services

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