Financial Constraints and Lender Selection: An Empirical Analysis

Abstract

In this paper, we evaluate the relative importance of the alternative sources of external finance (mainly debt) in the Indian context using probit regression analysis. Here we consider three different sources of external finance, namely the capital market, bank borrowings and borrowings from financial institutions and foreign institutional agencies and try to capture their relative contributions in alleviating financial constraints. We also examine whether their relative importance has changed in the post-liberalization period as compared to the pre-liberalization period. The results suggest that inspite of considerable developments in the Indian capital market since the initiation of the reforms, borrowing through intermediaries seems to dominate direct borrowing. The financial structure continues to be bank-based.

Keywords: financial constraints, external dependence, direct borrowing, bank loans, financial intermediation, bankruptcy

JEL Classification: G32