Abstract
This paper uses the entry of foreign banks into India during the 1990s-analyzing
variation in both the timing of the new foreign banks' entries and
in their location-to estimate the effect of foreign bank entry on
domestic credit access and firm performance. In contrast to the belief
that foreign bank entry should improve credit access for all firms,
the estimates indicate that foreign banks financed only a small set
of very profitable firms upon entry, and that on average, firms were
8 percentage points less likely to have a loan after a foreign bank
entry because of a systematic drop in domestic bank loans. Similar
estimates are obtained using the location of pre-existing foreign
firms as an instrument for foreign bank locations. Moreover, the
observed decline in loans is greater among smaller firms, firms with
fewer tangible assets, and firms affiliated with business groups.
The drop in credit also appears to adversely affect the performance
of smaller firms with greater dependence on external financing. Overall,
this evidence is consistent with the exacerbation of information
asymmetries upon foreign bank entry. © 2009 Elsevier Inc. All rights
reserved.
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