تاثیر ورود بانک های خارجی در بازارهای نوظهور: شواهدی از هند

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.

In many less-developed countries (LDCs), inefficient domestic banks and a lack of competition among lenders result in high borrowing costs and limited financial access for many firms. More developed countries, such as the US, Japan, and those in the European community, argue that LDCs should allow foreign banks to enter into their economies.1 By increasing competition, foreign bank entry may increase the supply of credit and improve efficiency.2 However, banking theories that incorporate information asymmetries demonstrate that greater competition among banks may actually reduce some firms’ access to credit (Petersen and Rajan, 1995). Moreover, the high cost of acquiring information about local firms may limit foreign banks to ‘cream-skimming’, where they lend only to the most profitable local firms (Dell’Ariccia and Marquez, 2004 and Sengupta, 2007) and adversely affect both domestic banks and the firms that rely upon them (Detragiache et al., 2008 and Gormley, 2007). These competing theories naturally lead to this paper’s central questions: does foreign bank entry improve credit access for domestic firms, and if so, which firms? Moreover, do these changes in the credit market affect the performance of domestic firms? The growing trend among LDCs to allow greater foreign bank entry and the degree of entry that typically occurs suggests that the answers may have important implications for financial policy in these economies. To answer these questions, this paper uses the entry of foreign banks into India during the 1990s to estimate the effect of foreign bank entry on domestic credit access. Geographical variation in foreign bank locations across India over time and the availability of firm-level loan data facilitates the use of novel identification techniques and makes India an ideal setting to analyze the impact of foreign bank entry. Using this data, I find evidence both of ‘cream-skimming’ by foreign banks and of a systematic drop in loans from domestic banks following foreign bank entry that lowers overall credit access for many domestic firms, particularly 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 banking theories that incorporate information asymmetries and has numerous policy implications. To identify the effect of foreign bank entry, I match financial data for Indian firms with the geographical location of newly-established foreign bank branches following India’s 1994 commitment to the World Trade Organization (WTO) to allow greater foreign bank entry. Foreign bank entry was staggered: some districts received a foreign bank branch as early as 1994, while others did not receive such a branch until 2001, and as of today, many districts have yet to receive a foreign bank. I then compare changes in the borrowing patterns of domestic firms located geographically near the new banks to changes in the borrowing patterns of firms located further from the new banks. This use of variation both in the timing of the new foreign banks’ entries and in their location within the country reduces potential biases that might arise from other country-wide changes to market openness, banking sector regulation, or access to public debt markets. Such country-wide changes would affect all firms in India and therefore unlikely explain changes in borrowing trends over time for firms located geographically near foreign banks versus those that are not. Moreover, by using firm-level data, I can also test for changes in credit access across different types of firms as well as control for any differences in the types of firms located in areas with a new foreign bank. To account for the endogenously-determined location choice of the new foreign banks within India, I also use the geographical distribution of foreign firms in India before the WTO agreement as an instrument for the location choice of new foreign banks following the agreement. I assume that foreign banks chose to enter markets with firms from their home country in order to preserve pre-existing relationships with these firms, but that these foreign firms’ presence is not otherwise related to domestic lending trends at the local level. This tendency for foreign banks to follow their customers abroad has been noted in a number of countries (Sabi, 1988 and Brealey and Kaplanis, 1996) and seems to occur in India as well. Moreover, there is no evidence that a foreign firm’s presence in India was otherwise related to the lending patterns of domestic firms located geographically nearby. Further buttressing the empirical design employed in this paper is the fact that numerous tests indicate that the necessary identification assumptions hold, and the instrumental variable (IV) estimates are similar in sign and magnitude to the ordinary least squares (OLS) estimates. Overall, the estimates suggest that competition from foreign banks is associated with a reallocation of loans that is not necessarily a boon to the lion’s share of domestic firms. The most profitable 10% of firms located near a new foreign bank branch received larger loans, but on average, firms were 7.6 percentage points less likely to have a long-term loan of any size following the entry of a foreign bank. This limited increase in loan sizes appears to arise from new foreign bank loans targeted primarily towards the most profitable firms. The decline in credit for all other firms, however, originates from a systematic drop in domestic bank loans that appears to be supply-driven rather than demand-driven. Moreover, this reallocation of loans occurs only for firms located in the vicinity of a new foreign bank, suggesting that banking markets are localized—and there is no evidence to indicate that the borrowing relationships of these firms followed different trends from those of firms located elsewhere in India prior to the entry of a foreign bank. The observed reallocation occurs within one to two years of the entry of a foreign bank and appears to persist for the duration of the sample time period. The reduction in overall bank credit also appears to disproportionately affect some firms’ access to bank credit and their subsequent performance. The observed decline in loans is greater among smaller firms, firms with fewer tangible assets, and firms affiliated with large business groups. Moreover, smaller firms located in industries requiring greater external financing exhibit a drop in sales growth, profitability, cash reserves, and capital expenditures following foreign entry. These declines in performance indicate an inability to substitute into alternative forms of financing after the drop in credit from domestic banks, and in further support of this hypothesis, there is no evidence to indicate that firms’ use of corporate bonds, equity issues, commercial paper, and other forms of financing increased following foreign bank entry. Additionally, the larger decrease in domestic loans allocated to firms with fewer tangible assets after foreign bank entry indicates domestic lenders may rely more heavily on fully collateralized loans after foreign bank entry. This evidence provides support to a recent and growing theoretical literature regarding the unique implications of competition between lenders that differ in both their access to information about firms and their respective costs of capital. In particular, the findings appear to be the most consistent with Detragiache et al. (2008) and Gormley (2007). Both papers show that the entry of foreign lenders, which are assumed to have less access to ‘soft’ information than domestic lenders, can lead to a segmented market with ‘cream-skimming’, and that this segmentation can also reduce credit access for informationally opaque firms.3 The targeted lending of foreign banks in India and the subsequent decline of domestic bank loans to informationally opaque firms, as captured by a firms’ size and group affiliation, is consistent with foreign lenders ‘cream-skimming’ the best firms and domestic lenders responding adversely to their entry. These findings also parallel an existing literature that examines the comparative disadvantage of large banks in the production and use of ‘soft’ information (Berger et al., 2005). These findings have numerous implications for financial policy in LDCs, which in recent years has increasingly trended towards the allowance of greater foreign bank entry. While the potential benefits of foreign bank entry are many, particularly when domestic banks are primarily state-owned (as in India), the evidence suggests that information asymmetries may prevent many firms in these economies from realizing these benefits.4 This evidence suggests that it may be necessary to adopt additional policies—beyond allowing foreign bank entry—to increase efficiency and improve credit access in LDCs. For example, reducing information barriers endemic to LDC credit markets may increase the range of firms that foreign banks are willing to finance upon entry and reduce the likelihood that informationally opaque firms or firms that rely on more ‘soft’ information type lending will be adversely affected by their entry (Detragiache et al., 2008 and Gormley, 2007). The evidence also suggests that the sequencing of reforms and fostering of a well-developed domestic financial market prior to foreign bank entry may be important as well. This paper is related to a number of recent studies on the impact of financial liberalization in emerging economies. The focus on a specific type of liberalization, foreign bank entry, is similar to recent work on the impact of foreign participation in domestic equity markets (Bekaert and Harvey, 2000, Bekaert et al., 2005, Chari and Henry, 2004, Henry, 2000a and Henry, 2000b). This paper also builds upon existing empirical work that makes use of firm-level and within-country variation to identify the impact of greater bank competition and banking deregulation (Cetorelli and Strahan, 2006, Zarutskie, 2006 and Bertrand et al., 2007). This paper is also related to a growing empirical literature that studies the type of domestic firm targeted by foreign banks and the country-level relationships between foreign bank entry, domestic bank performance, interest rates, and firms’ debt usage and sales.5 This paper compliments this literature by analyzing the changes in firms’ lending relationships with domestic banks and changes in their overall performance following foreign bank entry. The use of within-country variation also mitigates the concern of endogeneity bias that is present in cross-country comparisons and allows us to study the dynamic implications of foreign bank entry. This paper also provides novel evidence regarding the impact of liberalization when foreign bank entry occurs through de novo branches rather than the large scale acquisitions studied by Giannetti and Ongena (2009) in Eastern Europe. Recent theoretical work suggests foreign bank entry via de novo branching is more likely to have adverse effects than entry via acquisitions (Gormley, 2007). Finally, this paper is related to recent work by Berger et al. (2008) on banking relationships in India. Their paper finds that Indian firms with less ‘soft’ information are more likely to report having a foreign bank relationship, but that these firms appear to perceive the foreign bank relationships as more ‘fragile’ in that they also choose to have multiple banking relationships with a diverse set of lenders. Rather than focus on lending relationships at a particular point in time and the potential fragility of foreign bank relationships, however, this paper instead focuses on how the initial arrival of a foreign bank changes the overall allocation of credit and domestic firms’ credit access. Moreover, this paper studies how these changes may in turn have differing affects on the performance of some domestic firms.6 The remainder of the paper proceeds as follows. Section 2 provides a review of India’s policy change regarding foreign banks and Section 3 describes the data. The baseline regression and identification strategy are explained in Section 4 and Section 5 reports the OLS estimates. Section 6 contains robustness checks and IV estimates. Section 7 analyzes the differential effect of entry on firms along with other potential effects on firm performance. Finally, Section 8 concludes.

The entrance of new foreign banks to India is associated with a reallocation of loans that is not necessarily a boon to the lion’s share of domestic firms. The most profitable 10% of firms located near a new foreign bank branch received larger loans, but on average, firms were 7.6 percentage points less likely to have a long-term loan of any size following the entry of a foreign bank. This limited increase in loan sizes appears to arise from new foreign bank loans targeted primarily towards the most profitable firms. The decline in credit for all other firms, however, originates from a systematic drop in domestic bank loans. The findings are robust to using a number of different specifications, control variables, and instrumentation, and the timing of the loan reallocation coincides with foreign bank entry within each district. Moreover, the decline in domestic credit appears to be driven by shifts in the supply of loans rather than the demand for loans. This reallocation of loans following foreign bank entry in India suggests that information asymmetries in the market for loans are a significant factor in LDCs. While credit access is improved for many very profitable firms, the extent and nature of the drop in loans to informationally opaque firms, as captured by a firms’ size and group affiliation, suggests that some firms with positive net present value projects may have found it difficult to obtain loans after foreign bank entry. Furthermore, the reduction in credit also appears to adversely affect the performance of smaller firms located in industries requiring greater external financing. A larger decrease in the size of loans allocated to firms with fewer tangible assets after foreign bank entry also indicates that domestic lenders relied more heavily on collateralized loans after foreign entry. While the potential benefits of foreign bank entry are many, the evidence suggests that information asymmetries may prevent many firms in these economies from realizing these benefits, which is consistent with recent theoretical work by Detragiache et al. (2008) and Gormley (2007). This finding parallels an existing literature that examines the comparative disadvantage of large banks in the production and use of ‘soft’ information (Berger et al., 2005), and the potential effects that greater competition may have on the lending relationships that small and medium-sized entrepreneurs rely on (Boot and Thakor, 2000 and Petersen and Rajan, 1995). Since this study focuses on foreign bank entry via de novo branching, however, the policy implications may not necessarily apply to cases where foreign bank entry instead occurs through mergers and acquisitions. Recent theoretical work suggests that the adverse affects of foreign bank entry may be more likely to occur when foreign bank entry is limited to de novo branching (Gormley, 2007). Overall, the empirical findings presented in this paper suggest that a proper sequencing of reforms in developing economies may be necessary to realize the benefits of foreign lender entry when foreign bank entry occurs via de novo branches. Specifically, reducing information barriers prior to foreign lenders’ entry may improve the allocation of credit following liberalization and increase the range of firms foreign banks are willing to finance upon entry. For example, policymakers may consider strengthening accounting disclosure rules and promoting the development of credit evaluating agencies. By reducing banks’ costs of obtaining information about firms, such policies may increase the range of firms foreign banks finance and reduce the scope for a systematic drop in loans from domestic banks in response to increased competition.