How Successful are Banking Sector Reforms in Emerging Market Economies? Evidence from Impact of Monetary Policy on Levels and Structures of Firm Debt in India

28 Pages Posted: 27 Jun 2016 Last revised: 16 Apr 2023

See all articles by Sumon K. Bhaumik

Sumon K. Bhaumik

Aston University - Aston Business School; Institute for the Study of Labor (IZA); University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

Ali M. Kutan

Southern Illinois University at Edwardsville

Sudipa Majumdar

Symbiosis School of Economics; Middlesex University Dubai

Abstract

Many emerging markets have undertaken significant financial sector reforms especially in their banking sectors that have been quite critical for both financial development and real economic activity. In this paper, we investigate the success of banking reforms in India where significant banking reforms have been introduced since 1990s. Using the argument that well-functioning credit markets would reflect a bank channel for monetary policy at work, we test whether a change in monetary policy has predictable impact on borrowing behaviour of several types of firms, including business group affiliated, unaffiliated private firms, state-owned firms and foreign firms.The empirical results suggest that unaffiliated private firms have the most vulnerable to monetary policy stance during tight policy regimes. We also find that during tight monetary policy regimes, smaller firms are much more affected by monetary policy than large firms. In an easy money regime, monetary policy and the associated change in interest rate does not affect change in bank credit, change in total debt and the proportion of bank credit in total debt for any of the firms. We discuss the policy implications of the findings.

Keywords: credit markets, monetary policy, banking reforms, bank debt, debt structure

JEL Classification: E52, G21, G28, G32, O16

Suggested Citation

Bhaumik, Sumon K. and Bhaumik, Sumon K. and Kutan, Ali M. and Majumdar, Sudipa, How Successful are Banking Sector Reforms in Emerging Market Economies? Evidence from Impact of Monetary Policy on Levels and Structures of Firm Debt in India. IZA Discussion Paper No. 9992, Available at SSRN: https://ssrn.com/abstract=2800489 or http://dx.doi.org/10.2139/ssrn.2800489

Sumon K. Bhaumik (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, West Midlands B47ET
United Kingdom

Institute for the Study of Labor (IZA) ( email )

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

HOME PAGE: http://https://ideas.repec.org/e/pku30.html

Sudipa Majumdar

Symbiosis School of Economics ( email )

India

Middlesex University Dubai ( email )

Knowledge Village, Block 16
PO BOX 500697
Dubai
United Arab Emirates

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