Bank Ownership and the Effects of Financial Liberalization: Evidence from India
IMF Working Papers, March 1, 2011
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Bibliographic details
- Authors: Poonam Gupta, Kalpana Kochhar, Sanjaya P Panth
- Published: March 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455218929.001
Summary and research question
- 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.
- Using the Indian experience with liberalization of the financial sector, the authors analyze whether public and private banks deployed resources freed up by reduced state preemption to increase credit to the private sector.
Data and methodology
- Bank-level data from 1991-2007 were used to examine responses of public and private banks to financial liberalization.
- State pre-emption is measured in terms of the requirement to hold government securities as a share of assets.
Key findings
- Even after liberalization, public banks allocated a larger share of their assets to government securities than did private banks.
- Public banks were more responsive in allocating relatively more resources to finance the fiscal deficit even during periods when state pre-emption 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.
Policy implications and interpretation
- Financial liberalization alone may not lead to greater credit to the private sector if public banks continue to direct resources toward government financing.
- Reductions in formal state pre-emption requirements may have limited impact when banks remain government-owned and fiscal deficits remain high.
- Consideration of bank ownership structure and fiscal balance is important when assessing the potential effectiveness of financial sector reforms in expanding private sector credit.
Publication and metadata
- By. Poonam Gupta, Kalpana Kochhar, Sanjaya P Panth
- March 1, 2011
- Pages: 45
- Volume: 2011
- Issue: 050
- Series: Working Paper No. 2011/050
- DOI: https://doi.org/10.5089/9781455218929.001
- Stock No: WPIEA2011050
- ISBN: 9781455218929
- ISSN: 1018-5941
- Subject: Banking, Commercial banks, Government debt management, Government securities, State-owned banks
- Keywords: bank, private bank, public bank, securities, WP
IMF Working Papers — Bank Ownership and the Effects of Financial Liberalization: Evidence from India