Logo text

Home » Faculty and Research » Research And Publication » Working Papers

Working Papers

 
 Title

State-owned banks and credit allocation in India: Evidence from an asset quality review

 Authors

Das, Abhiman; Mohapatra, Sanket; Nigania, Akshita

 Publication Date

23-Feb-2022

 Year

2022

  Publication Code

WP 2022-02-01

 Abstract

This paper examines the role of state-owned banks’ presence in allocation of credit to different sectors in India using the central bank's Asset Quality Review (AQR) as a quasi-natural experiment. The AQR resulted in a larger increase in non-performing loans of state-owned banks as compared to other banks. We exploit the heterogeneity in the presence of state-owned and other banks across districts to identify the supply side channels for bank credit reallocation. Using a difference-in-differences analysis, we find that the top-third of districts based on presence of state-owned banks' branches experienced a higher fall in the share of credit to the industrial sector in the post-AQR period compared to other districts. Such districts also experienced a greater increase in retail loans, which are considered less risky compared to industrial loans. Further, an analysis using a panel vector autoregression finds that the AQR, through an increase in non-performing loans of state-owned banks, led to a decrease in economic growth at the district-level. The results of this study suggest that central bank policy reforms can influence bank credit allocation at the sub national level and have real economy effects.

 

Click here to Download (English) File

Back