Credit Allocation to Diverse Sectors of Indian Economy:An Empirical Investigation of Foreign Banks Entry

Efficient credit allocation is essential for developing countries as accessibility of capital is limited for economic growth. Foreign banks have better access to the international market and support in meeting credit requirementof various sectors and industries in developing countries. Foreign banks are known for cherry picking behavior, lending strategy to be profitable that affects some sectors of the host economy adversely. Thus, this study attempts to measure the impact of foreign banks entry on the credit allocation to diverse sectors in the Indian economy. The study uses panel data, considering bank groups as cross sections and years from 1996 to 2015 as time series data. The study uses GLM estimator and Panel ARDL estimator for analysis and to check the robustness of the estimator respectively. The findings show that the growth of the sector attracts more bank credit. However, in spite of the growth in the agriculture sector, there is a reduction in credit supply by foreign banks. All the bank groups reduce their lending during high NPAs. The study finds a negative impact of foreign banks entry on the credit allocation to the agriculture, services, and industrial sector of Indian economy. The need of the hour is to revisit the policy on foreign banks that enhance credit information and abide by more foreign banks entry in the rural areas.