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Banking Reform in India∗ - page 19 / 57

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period 1980-1990 relative to the 1969-1979 period, there was no differential effect for nationalized and private banks. In the nineties, deposit and credit growth slowed further still. In this liberalized environment, deposits and credit of the nationalized banks slowed down more than the private banks: deposits grew 7.3 percent slower, while credit grew 8.8 percent less quickly. These results are significant at the ten and five percent level, respectively.

The growth rate in bank branches generally tracked credit and deposits, though the decline after 1980 was more severe. While the growth rates for nationalized banks were slightly lower in both periods, the differences are not statistically significant.

To answer the question of whether there was a significant difference between public and private banks prior to nationalization, we re-estimate equation (4), replacing the bank fixed

2 + π 2 K effects with a nationalization dummy, and a control function (Kb,80) = π1Kb,80 controls for the effect of 1980 log deposits of each bank in 1980 (denoted Kb,80 b , 8 0 , which ). (These results

are not reported, but are available from the authors). The control function allows bank growth to depend on bank size, while the nationalization dummy will pick up any differences between the nationalized and non-nationalized banks that are not related to size. The estimates suggests that credit, deposit and number of branches grew at the same speed between 1969 and 1979 for banks that were going to be nationalized in 1980 and those that were not. The coefficients on the interaction terms (P ostt Natb) and (Ninetiest Natb) remain negative, and are virtually unchanged from the specification we present in Table 5. Thus, it is only after the 1980 nation- alization that banks nationalized in 1980 started to grow more slowly. These results provide some evidence that nationalization hindered the spread of intermediation in the 1990s, but not earlier.

In the next section, we look for features of public banks that may explain the above results, examining both official lending policies, and other incentives faced by employees of public sector banks.

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