In 1980, India nationalized its large private banks. This induced different bank ownership patterns across different towns, allowing credible identi
cation of the effects of bank ownership on
nancial development, lending rates, and the quality of intermediation, as well as employment and investment. Credit markets with nationalized banks experienced faster credit growth during a period of
nancial repression. Nationalization led to lower interest rates and lower quality intermediation, and may have slowed employment gains in trade and services. Development lending goals were met, but these had no impact on the real economy.
Download PDFHow vulnerable are economic interventions to political capture, how are captured resources used, and how costly are the resulting distortions? This paper answers these questions in the context of the credit market in India. Integrating theories of political budget cycles with theo- ries of tactical electoral redistribution yields a compelling framework to test for the presence of capture. I
nd that government-owned banks are subject to substantial capture: the amount of agricultural credit lent by public banks is 5-10 percentage points higher in election years than in years following an election, and in election years more loans are made to districts in which the ruling state party had a narrow margin of victory (or a narrow loss) in the previous election. This targeting does not occur in non-election years. Politically motivated loans are costly: they are less likely to be repaid, and election year credit booms do not measurably a¤ect agricultural output.
