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Banking Reform in India∗ - page 17 / 57





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ˆ Table 4 provides estimates of the size of the discontinuity, ˆγ1 + δ2 14.5, estimated on data

from 1992, and 2000, separately. For example, for agriculture in 1992, the estimated break is .084, with a standard error of .029: the difference between nationalized and private banks is quite significant, both economically and statistically.

The point estimates of the structural break confirm some of the differences described above, but suggest that others are merely functions of bank size. In particular, as measured by credit in 1992, nationalization had a causal effect on agricultural credit and rural credit, increasing each by about 8 percentage points. These numbers are large, given that the set of all banks lent only 11 percent of credit to agriculture and 12 percent to rural areas. These results are significant at the 1 percent level. Nationalization appears to have had no effect on the amount of credit banks lend to small scale industry, but caused a nine percentage point decrease in the credit banks issued to trade, transport and finance. Not surprisingly, we see that nationalized banks lend more to government-owned enterprises; the two-percentage point difference is particularly large in light of the fact credit to government borrowers represents only two percent of bank credit. Public sector banks appear to lend at slightly lower interest rates, though the point estimate, seventy basis points, is not statistically significant. We also attempted to measure whether public sector banks gave more credit to industries that had been identified for support in various five-year plans after 1980, but found no evidence that these industries were favored.

The differences between the nationalized and private banks seem to have decreased over time: in the 2000 data, the point estimate on agricultural lending drops from 8 to 5 points, on rural lending from 7 to 3 points, and on trade and transport and finance from -11 to -6 percentage points.

In sum, bank ownership does seem to have had a limited impact on the government’s ability to direct credit to specific sectors. Through the early 1990s, the credit environment in India was very tightly regulated. The government set interest rates, required both public and private banks to issue 40 percent of credit to the priority sector, and to meet specific sub-targets within the priority sector. Nevertheless, banks controlled by the government provided substantially more credit to agriculture, rural areas, and the government, at the expense of credit to trade, transport, and finance. though, Surprisingly, there was no effect on credit to small scale industry. Lending differences shrunk over the 1990s, and in 2000 were about half of what they were in


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