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Banking Reform in India∗ - page 18 / 57

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the early 1990s. This might reflect the increasing dynamism of the private sector banks in the liberalized environment of the 1990s or the loosening grip of the government on the nationalized banks.

3.3

Bank Ownership and Speed of Financial Development

To determine whether public ownership of banks inhibits financial intermediation, we again compare banks just above and just below the 1980 nationalization cut-off, using data from the Reserve Bank of India, for the period 1969 to 2000. We include the six above, which were nation- alized, and the nine largest below, which were not.22 Since we have data from both the pre and post period, we adopt a difference-in-differences approach. Specifically, we regress the annual change in bank deposits, credit, and number of bank branches on a dummy for post national- ization (Postt=1 if year(1980 1991)), and a dummy for post-nationalization in a liberalized environment (Ninetiest = 1 if year (1992 2000)). We break the post-nationalization analysis up into two periods (1980-1991 and 1991-2000) because the former period was characterized by continued financial repression, while substantial liberalization measures were implemented in the beginning of the 1990s. Public and private banks could well behave differently before and after liberalization. Because larger banks may grow at different rates than small banks, we include bank fixed effects (βi). We thus regress:

ln (yb,t/y

b,t1)

= βi + θ1P ostt + θ2 Ninetiest +

(4)

γ1 (P ostt Natb) + γ2 (Ninetiest Natb) + εb,t

The parameters of interest are γ1 and γ2, which capture the differential behavior of nation- alized banks after the nationalization. Standard errors are adjusted for auto-correlation within each bank. [TABLE 5 ABOUT HERE] Table 5 presents the results for growth in credit, deposits and bank branches. The results

suggest that while the overall rate of growth in deposits and credit slowed substantially in the

22 In 1985, the Lakshmi Commercial Bank was merged with Canara Bank, a large public sector bank, due to financial weakness. In 1993, the New Bank of India (nationalized in 1980) was merged with the Punjab National Bank. Since both the Canara and Punjab National banks were nationalized in 1969, they are not in our sample.

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