Can Small Business Lending Programs Disincentivize Growth? Evidence from India's Priority Sector Lending Program

55 Pages Posted: 14 Feb 2019

See all articles by Gursharan Bhue

Gursharan Bhue

University of Chicago Booth School of Business

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Prasanna L. Tantri

Indian School of Business

Date Written: January 30, 2019

Abstract

Programs to direct finance to small firms are ubiquitous. We study their real-side effects for target firms, exploiting the discontinuities in eligibility in such a program in India. We show that small firm lending programs can slow real growth. Several robustness, placebo, heterogeneity, and external validation tests as well as extensive margin tests are consistent with such distortionary effects. These findings collectively show that financial constraints matter: they shape how firms form and grow. Firms give up growth for better financing access but in doing so, they distort their growth trajectories by remaining small for longer periods of time.

Keywords: Small Business Lending, Soft Information, Lending Quotas, Bank Power, Small Firm Growth

JEL Classification: G31, G28, D04, O43

Suggested Citation

Bhue, Gursharan and Prabhala, Nagpurnanand and Tantri, Prasanna L., Can Small Business Lending Programs Disincentivize Growth? Evidence from India's Priority Sector Lending Program (January 30, 2019). Indian School of Business, Available at SSRN: https://ssrn.com/abstract=2960598 or http://dx.doi.org/10.2139/ssrn.2960598

Gursharan Bhue

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Nagpurnanand Prabhala (Contact Author)

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

Prasanna L. Tantri

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India
9160099959 (Phone)

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