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

45 Pages Posted: 14 Mar 2011

See all articles by Poonam Gupta

Poonam Gupta

Delhi School of Economics

Kalpana Kochhar

International Monetary Fund (IMF)

Sanjaya Panth

affiliation not provided to SSRN

Date Written: March 2011

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.

Keywords: Banks, Credit expansion, Financial sector, India, Private sector, Public enterprises

Suggested Citation

Gupta, Poonam and Kochhar, Kalpana and Panth, Sanjaya, Bank Ownership and the Effects of Financial Liberalization: Evidence from India (March 2011). IMF Working Papers, Vol. , pp. 1-45, 2011. Available at SSRN: https://ssrn.com/abstract=1784538

Poonam Gupta

Delhi School of Economics ( email )

Department of Economics
Delhi University
Delhi, Delhi 110007
India

Kalpana Kochhar

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Sanjaya Panth (Contact Author)

affiliation not provided to SSRN ( email )

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