Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program

Abhijit Banerjee and Esther Duflo

No 4681, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 lending 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 unconstrained firms will primarily use it as a substitute for other borrowing. We then apply this methodology to firms in India that became eligible for directed credit as a result of a policy change in 1998, and lost eligibility as a result of the reversal of this reform in 2000. Using firms that were already getting this kind of credit before 1998, and retained eligibility in 2000 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 of the firms must have been severely credit constrained.

Keywords: Banking; Credit constraints; India (search for similar items in EconPapers)
JEL-codes: G20 O16 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-dev and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (123)

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Journal Article: Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program (2014)
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