Directed Credit, Financial Development and Financial Structure: Theory and Evidence

Chakrabarti, Debkumar and Sethi, Pradeepta and Bhattacharjee, Sankalpa (2018) Directed Credit, Financial Development and Financial Structure: Theory and Evidence. Applied Economics. ISSN 0003-6846

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Abstract

The recent initiative of the RBI in reviving the policy of directed credit allocation in a period dominated by the neoliberal philosophy necessitates reconsideration of the role of policydirected credit allocation process on financial development and financial structure of firms. Introducing certain policy parameters, the paper attempts to model how financial development financial structure interlinkage is influenced by the liberalization policies of the government. The theoretical construct is empirically verified using both aggregated and disaggregated (firm-level) data comprising a panel of 932 Indian manufacturing firms. Findings reveal that following the liberalization measures in the early 1990s, there has been a structural shift in the debt–equity ratio of firms, with equity market activities assuming prominence over time. As regards financial development, it has been observed that the withdrawal of DFIs specialized in term-lending activities in the early 2000s led to a significant increase in the degree of financing constraints faced by the manufacturing firms. This contradicts the basic premise of financial liberalization. The paper argues that under certain conditions, government intervention in the form of directed credit programmes would not only act as an effective instrument in ushering financial development, but also provide important guidelines in ensuring sustainability of institutions.

Item Type:	Article
Uncontrolled Keywords:	Financial Development; Financial Liberalization; Financial Structure; Structural Break; Panel Data
Subjects:	Finance
Divisions:	Finance and Strategy
Depositing User:	Mr. Muralidhara D
Date Deposited:	28 Nov 2018 10:52
Last Modified:	25 Feb 2019 10:41
URI:	http://tapmi.informaticsglobal.com/id/eprint/495

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