Firm Financing in India: Recent Risks and Patterns

67 Pages Posted: 12 Jan 2005

See all articles by Inessa Love

Inessa Love

World Bank - Development Economics Data Group (DECDG)

Maria Soledad Martinez Peria

International Monetary Fund (IMF)

Date Written: January 2005


Using balance sheet information for nearly 6,000 firms between 1994-2003, Love and Martinez Peria investigate recent firm financing patterns in India. They document the overall use of debt and, in particular, the role of bank financing (short-term and long-term), trade credit, intra-business group borrowing, and foreign financing. The authors examine financing patterns over time and explore differences across firms by sector, age, ownership type, export orientation, and, in particular, size. In terms of trends, they find that while debt to asset ratios have been relatively stable, nominal debt growth has slowed down in recent years. At the same time, firms' repayment capacity, as measured by the interest coverage ratio, has exhibited a U-shaped pattern falling during 1997-99 and recovering in recent years. Throughout the period of study, bank financing as a share of total debt has increased, while borrowing from nonbank financial institutions fell sharply. In terms of differences across firms, the most robust finding is that debt levels increase with firm size. Smaller firms have especially less debt relative to larger firms if they are young (below 10 years since incorporation), if they are in the manufacturing sector, and if they are located in Southern India. Furthermore, while the ratio of debt to assets has been relatively stable for large firms, the authors observe a significant decline for smaller firms. Overall, the findings presented provide suggestive (but not definite) evidence of stronger credit constraints for smaller firms.

This paper - a product of the Finance Team, Development Research Group - is part of a larger effort in the department to study access to finance.

Keywords: Domestic, Finance

Suggested Citation

Love, Inessa and Martinez Peria, Maria Soledad, Firm Financing in India: Recent Risks and Patterns (January 2005). World Bank Policy Research Working Paper No. 3476. Available at SSRN:

Inessa Love (Contact Author)

World Bank - Development Economics Data Group (DECDG) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States


Maria Soledad Martinez Peria

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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