The Real Effects of Bank Branching: Evidence from India
51 Pages Posted: 17 Mar 2021
Date Written: March 15, 2021
We study the impact of regulations expanding bank branching in India. We find that public sector banks (PSBs) reduce their lending to poorly performing firms when branching expands in a district. Non-performing loans at PSBs also increase when branching expands. Also, inefficient firms that depend on PSBs deleverage and are more likely to exit after branching expands in a district. At the plant level, exposure to branching is associated with an expansion in size and employment. These results suggest that greater credit market competition can lead to more efficient lending and increased economic activity in economies with protected credit markets.
Keywords: Capital misallocation, bank branching, competition, India
JEL Classification: G21, G28, O16, O47
Suggested Citation: Suggested Citation