India’s Banks: Lending to Productive Firms?

By Siddharth George, Divya Kirti, Soledad Martinez Peria, Rajesh Vijayaraghavan

April 29, 2022

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Siddharth George, Divya Kirti, Soledad Martinez Peria, and Rajesh Vijayaraghavan. India’s Banks: Lending to Productive Firms?, (USA: International Monetary Fund, 2022) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Capital misallocation is widely thought to be an important factor underpinning productivity and income gaps between advanced and emerging economies. This paper studies how well Indian banks allocate capital across firms with varying levels of productivity. The analysis reveals that the link between productivity and bank credit growth is weaker for firms with significant ties to public sector banks, especially in years when public sector banks represent a large share of new credit. Large flows of credit to unproductive firms represent important missed growth opportunities for more productive firms. These results suggest that measures to improve governance of public sector banks, potentially including privatization, would help reduce capital misallocation.

Subject: Bank credit, Commercial banks, Credit, Financial institutions, Money, Production, Productivity, State-owned banks

Keywords: Allocation of credit, Bank credit, Bank lending, Capital misallocation, Commercial banks, Credit, Credit growth, Global, Productivity, Productivity, PSB dependence, PSB share, Public sector bank, State-owned banks

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/073
Stock No:

WPIEA2022073
ISBN:

9798400206665
ISSN:

1018-5941

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