Do firms want to borrow more? : testing credit constraints using a directed lending program

56 Pages·2002·1.8 MB·English

by  Banerjee, Abhijit V

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Massachusetts Institute of Technology
Department of Economics
Working Paper Series
DO FIRMS WANT TO BORROW MORE?
TESTING CREDIT CONSTRAINTS USING A DIRECTED
LENDING PROGRAM*
Abhijit Banerjee
Esther Duflo
Working Paper 02-25
May 2002
Room
E52-251
50 Memorial Drive
MA
Cambridge, 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssrn,com/paper.taf?abstract id=316587
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Massachusetts Institute of Technology
Department of Economics
Working Paper Series
DO FIRMS WANT TO BORROW MORE?
TESTING CREDIT CONSTRAINTS USING A DIRECTED
LENDING PROGRAM*
Abhijit Banerjee
Esther Duflo
Working Paper 02-25
May 2002
Room
E52-251
50 Memorial Drive
MA
Cambridge, 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssrn.com/paper.taf?abstract_id=XXXXX

Do Firms Want to Borrow More?
Testing Credit Constraints Using a Directed Lending Program1*
Abhijit V. BanerjeeWd Esther Duflo*
May 2002
Abstract
We begin the paper by laying out a simple methodology that allows us to determine
whether firms are credit constrained, based on how they react to changes in directed lend-
ing programs. The basic idea is that while both constrained and unconstrained firms may
be willing to absorb all the directed credit that they can get (because it may be cheaper
than other sources of credit), constrained firms will use it to expand production, while un-
constrained firms will primarily use it as a substitute for other borrowing. We the apply
this methodology to firms in India that became eligible for directed credit as a result of a
policy change in 1998. Using firms that were already getting this kind of credit before 1998
to control for time trends, we show that there is no evidence that directed credit is being
used as a substitute for other forms of credit. Instead the credit was used to finance more
production-there was significant acceleration in the rate of growth of sales and profits for
these firms. We conclude that many ofthe firms must have been severely credit constrained.
Keywords: Banking, Credit constraints, India JEL: 016, G2
*We thank Tata Consulting Services for their help in understanding the Indian banking Industry,
Sankarnaranayan for his work collecting the data, Dean Yang and Niki Klonaris for excellent research assis-
tance, and Robert Barro, Sugato Battacharya, Gary Becker, Ehanan Helpman, Sendhil Mullainathan, Kevin
Murphy, Raghuram Rajan and Christopher Udry for very useful comments. We are particularly grateful to the
administration and the employees ofthe bank we study for their giving us access to thedataweuse in this paper,
department ofEconomics, MIT.
'Department ofEconomics, MIT, NBER and CEPR.