Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?

In 1980, India nationalized its large private banks. This induced di¤erent bank ownership patterns across di¤erent 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. Harvard Business School. Contact: [email protected], +1 617-495-6525, (fax) +1-617-4957659. I thank Abhijit Banerjee, Esther Du‡o, and Sendhil Mullainathan for guidance, Abhiman Das and R.B. Barman of the Reserve Bank of India for substantial support. I also thank Abhiman Das for performing calculations on data at the Reserve Bank of India. In addition, I thank the editor, two anonymous referees, Victor Chernozhukov, Ivan Fernandez-Val, Andrei Levchenko, Petia Topalova for helpful comments, and participants of at various workshops and seminars. Gautam Bastian and Samantha Bastian provided excellent research assistance. Financial support from a National Science Foundation graduate research fellowship is acknowledged.