Introduction

Abstract

Motivation for the study

Inefficient credit allocation, judicial delays and lack of competition
among lenders are the prominent arguments put forth by countries
like U.S., Japan and those in the European community on why Less
Developed Countries (LDC) should allow foreign banks New Bank
branches to operate in their economies 1. The opening of financial
markets in LDCs has also become standard policy associated with the
World Trade Organization (WTO)2. As a result, many of the LDCs
(including India) liberalized their capital controls during the 1980s
and the early [Link]; theoretical arguments suggest that
banking competition has ambiguous effects on the host country. Due
to the information cost and weak creditor’s rights in LDCs, foreign
banks New Bank branches would cherry –pick their borrowers and
would leave the riskier borrowers for the domestic banks (Petersen
and Rajan, 1995). These competing arguments naturally lead to
certain questions like : does enhancement of creditor’s rights improve
credit access for domestic firms, and if so, for which firms? The
importance of the study can be well recognised by the forward
statement on IBC :
…the code evolves further, it needs a careful evaluation, analysis,
through comparison of its actual achievements with the desired
outcomes as laid down in the Code. With a view to streamline the
processes under the Code and to facilitate faster exit of firms, the
IBBI has been engaging with stakeholders to build discourse around
critical aspects and best practices webbed around the insolvency
space in the country. Academic knowledge, empirical evidence based
on rigorous analysis and domain expertise etc. can collectively lead to

1
In a memo to the World Trade Organization on June 6, 2005, delegations from
Japan, U.S., and E.U. argued that “Policies that impede competition, such as entry
restrictions and restrictions on foreign banks, have been shown to raise the cost of
financial services and hurt economic performance.” Refer : WTO Document #05-
2335 .
2
Council for Trade in Services - Committee on Trade in Financial Services - Special
Session, Document code S/FIN/W/43.(1984)
further refinement in the formation and implementation of the
policies of the Government3
I propose to empirically examine the debt financing by banks across
time along with multiple enactment of bankruptcy Laws in India.

Introduction
Credit dynamics of firms and it’s dependencies on prudential
Insolvency norms have been a topic study (Schularick and Taylor,
2012; Jordà, Schularick, and Taylor, 2013; Mian, Sufi, and
Verner, 2017; Greenwood, Hanson, Shleifer, and Sørensen, 2022;
Ivashina, Kalemli-Özcan, Laeven, and Müller, 2024). However, most of
the research deals with (i) advanced economies and/or (ii) assumes
infinite demand elasticity by the firms. We propose to access the
heterogeneous impact of firm financing supply and demand industry
wise exclusively for India.
Our emphasis will be on firms’ response to policy shocks due to
transition in creditor rights differs from existing literature that
considers the impact of creditor rights on risky investments (Acharya
et al., 2011); on firms’ capital structure decisions (Cho et al., 2014;
Gilson, 1997); and on bankruptcy reforms and recovery from a debt
crisis (Bergoeing, Kehoe, Kehoe, and Soto 2002). Specifically, we
propose to study the impact on bank financing due to Insolvency and
Bankruptcy and Bankruptcy code (2016) in conjugation with
SARFAESI Act (2002) across Industries in India. We propose to
incorporate Two-way fixed effect (TWFE) difference-in-differences
setups with a continuous treatment so that we can capture both the
shock on bank lending sequentially and in conjugation post 2016.

We make use of exogenous policy reforms that strengthens the rights

of creditors in India to identify the effects of the change in the law on
the volume of secured credit both from the demand and supply sides
for different types of firms. This comprehensive analysis would allow

3
IBC: Idea, Impressions and Implementation. (2022). Retrieved January 16,
2025, from
[Link]
the regulatory bodies to determine the differential impact of their
policy decisions with respect to credit allocation to heterogeneous
firms based on age, past profitability, tangibility, group affiliation and
share listing.

SARFAESI Act, 2002

The SARFAESI Act brought about an important change in the legal

system of India, a transition to a pro-creditor regime, by improving
the rights of secured creditors. Prior to the SARFAESI Act, secured
creditors did not have the right to seize and sell the securities of the
defaulting firms in order to recover their dues. The Act ushered a new
era of creditor rights by allowing secured creditors to bypass the
lengthy court process and seize assets of defaulting firms 4. With the
enactment of SARFAESI Act, Banks and Financial Institutions could
take over the assets and management of any company that defaulted
in payments for over six months by giving a notice of 60 days. Further,
the borrowers could only appeal against the creditor’s decision after
depositing 75 percent of the defaulted amount. A sound secured
transactions law was considered important for attracting funds
from foreign banks New Bank branches thus promoting trade
and growth. Further, a good creditor friendly system was
considered essential for promotion of secured credit in India,
which in turn was argued, would lead to economic prosperity in
India.5 Hence, if SARFAESI Act does not meet these objectives of the
central bank then the purpose of the act is not fulfilled.

It was felt by the corporate houses that such a law would give banks
and FIs excessive powers which they would abuse. It was also argued
that the law was unfair since the law gave the borrowers practically
no right to appeal. Their basic point was that if they (borrowers) had
sufficient resources to deposit 75% of the total amount, they would
not default on the interest payments to begin with.6
4
According to the World Bank Doing Business Report (2006), the time to recover
collateral in India came down from 10 years to 6 months in some cases due to the enactment
of a reform that made enforcing security significantly easier.
5
As suggested in the details of the Bare Act, (The SARFAESI ACT 2002, Commercial Law
Publishers, 2007)
6
On April 8th, 2004 the Supreme Court, in its landmark judgment on the Mardia Chemicals and Union of India case, upheld the
constitutional validity of the law.
All these arguments indicate that the SARFAESI Act did have an
impact on the credit allocation in India but it was not without
opposition from the firms. This opposite impact of the SARFAESI Act
is that we also propose to capture in our model.

The IBC reform (2016)

The Insolvency and Bankruptcy Code (IBC) of 2016

significantly overhauled India's insolvency framework by
consolidating various fragmented laws into a unified system for
resolving insolvencies. Prior to the IBC, insolvency procedures
were governed by multiple laws such as the SARFAESI Act
(2002), the Companies Act (1956), and the Sick Industrial
Companies Act (SICA, 1985), each of which applied to specific
types of debtors and creditors. The IBC, on the other hand,
applies to all entities and grants all creditors—whether
secured, unsecured, financial, or operational—the right to
initiate insolvency proceedings.
This broad application of the IBC represents a major departure
from the earlier system, where unsecured creditors lacked
rights to seek insolvency resolution, and the rights of secured
creditors were often prioritized. The IBC, by enabling a more
inclusive and transparent process, encourages a collective
approach to assessing the viability of a distressed firm. Its
design aims to resolve insolvencies more efficiently than
previous systems, which were slow and disjointed.
The Economic Survey of India (2020) highlights the success of
the IBC in improving recovery rates and reducing resolution
times. Under the IBC, creditors recover an average of 42.5% of
the amounts owed, compared to just 14.5% under the
SARFAESI Act. Moreover, the average time for resolution under
the IBC is about 340 days, far shorter than the 4.3 years it took
under the older framework. The IBC focuses on preventing
corporate failure and preserving the value of distressed firms,
prioritizing restructuring and reorganization over liquidation.
This approach not only protects creditor rights but also helps
ensure the continued viability of firms that can be saved.
Overall, the IBC has created a more favourable environment for
credit availability without limiting credit demand, in contrast
to the SARFAESI Act, which negatively impacted the demand
for secured debt, as pointed out by Vig (2013). Through these
reforms, the IBC has transformed India's insolvency landscape,
providing a more efficient and equitable system for all parties
involved.
However, contrary to this apprehension, in the first six months
after the IBC law was introduced, around 24% of the petitions
were led by debtors (Chatterjee et al., 2017). As the law
establishes a framework for collective action by creditors to
resolve the financial stress of the debtor, the process shifts
away from a debtor-in-possession model to a model where
creditors decide on the resolution while an impartial
professional runs the operations of the debtor as a going
concern. Hence, due to the expedited “creditor in control”
resolution process and the aim to prevent corporate failure and
maintain the value of a distressed firm under the IBC law, we
do not expect a decrease in long-term demand for debt or a
decrease in corporate risk taking.

Supply Side
On the supply side, due to stronger creditor rights in the post-
legislation period, we expect an improvement in bank credit
supply to distressed firms. Araujo et al. (2012) and Rodano et al.
(2016) document that bankruptcy reforms aimed at
strengthening creditor rights help reduce the cost of debt and
improve access to credit and investment. Djankov et al.
(2007) document that strengthened creditor rights are
associated with a higher ratio of private credit to GDP,
corroborating the notion that improved creditor rights
facilitate credit market development. Further, Ponticelli and
Alencar (2016) and Neira (2019) highlight that improved
bankruptcy procedures result in higher lending. Hence, as the
suppliers of credit are more protected post-IBC, they are more
willing to supply credit to distressed firms. Overall, the IBC
helps in expanding credit availability without restricting credit
demand, unlike the legislation of SARFAESI that protected the
secured creditors resulting in a decrease in credit demand.
Although there is a significant body of literature emphasizing the
importance of creditor rights in credit market development (La Porta
et al., 1997; La Porta et al., 1998; Djankov et al., 2007; Haselmann et
al., 2010), ensuring the effective functioning of capital markets
remains a challenge, especially in developing economies with weaker
legal frameworks and lower institutional quality (Aghion et al., 2005).
In these economies, where contract enforcement is costly and time-
consuming (Gopalan et al., 2016; Vig, 2013), and where information
asymmetry often leads to cream skimming (Gromley, 2008; Sinha,
2012), There is an extensive literature that identifies creditor rights as
a significant determinant of credit market development (La Porta et
al., 1997, La Porta et al., 1998; Djankov et al., 2007; Haselmann et al.,
2010). As a matter of fact, ensuring the effective functioning of capital
markets has been a matter of concern for policy makers, especially in
developing economies with weaker legal framework and lower
institutional quality (Aghion et al., 2005), and where contract
enforcement is costly and time consuming (Gopalan et al., 2016; Vig,
2013,Sinha,).
Our paper contributes to the literature that links enforcement costs to
firms' debt maturity choice. This is central to the study of Gopalan et
al. (2016) who, by exploiting the introduction of DRTs in India, find
that reducing enforcement costs leads firms to decrease their reliance
on short-term debt as a source of financing in favour of more
developmentally-focused long-term debt. In this regard, the results
are supportive of Diamond (2004)’s “lender passivity” argument
according to which a decrease in contract enforcement costs should
have, ceteris paribus, a dual effect. On the one hand, it increases
lenders' willingness to grant long-term credit, as sound legal regimes
may encourage lenders' enforcement of contracts by making it either
less costly or highly effective. On the other hand, it induces firms to
opt for long-term debt in their financing mix, as short-term debt
involves costs for firms since it limits a firm's ability to renegotiate
better credit terms following credit quality improvement (Roberts and
Sufi, 2009). Therefore, the policy's departure from the earlier
approach of “debtor in possession” to “creditor in possession” acts to
decrease contract enforcement costs in a scenario where the
sustainability of firms' access to credit now depends less on short- and
more on long-term debt.
Literature based on Creditors rights
Another strand of literature exploits cross-country variation in
creditor rights in order to investigate the relationship between
legal institutions and corporate debt structure. It is based on
the premise that the rights attached to securities become
critical when managers of companies act in their own interest.
These rights give investors the power to extract from managers
the returns on their investment. Shareholders receive dividends
because they can vote out the directors who do not pay them,
and creditors are paid because they have the power to
repossess collateral. The paper by La Porta, Rafael, Florencio
Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny (1998)
examines how laws protecting investors differ across 49
countries. The author used an index aggregating different
creditor rights. The index is formed by adding 1 point each to
the following:
(1) The country imposes restrictions, such as creditors’
consent or minimum dividends to file for reorganization of the
firm;
(2) Secured creditors are able to gain possession of their
security once the reorganization petition has been approved
(no automatic stay);
(3) Secured creditors are ranked first in the distribution of the
proceeds that result from the disposition of the assets of a
bankrupt firm; and
(4) The debtor does not retain the administration of its
property pending the resolution of the reorganization.
Thus index ranges from 0 to 4. The result showed that the
average score of the above four parameters together for
countries following English Origin Law is 3.11 as compared to
that of the French origin (1.58), German origin (2.33) and
Scandinavian origin (2.00).
Further, the differences are significant for each of the above
mentioned four parameters between countries of English and
French origins. The mean-difference and the significance level
(SL) of the mean difference for each parameter are as follows:
(1) Reorganization: 1.74 (1% SL), (2) Automatic Stay: -
2.88(10% SL), (3) Secured creditors first: -2.34(5% SL) and (4)
Management stay: -3.54 (10% SL).
Paper by Sujata Visaria (2006), investigates the loan level data
set of a large Indian bank to estimate the impact of Debt
Recovery Tribunal7 (DRT). Based on loan level data Visaria
analyzed the impact of DRT on the time taken to recover the
loans. This was one of the pioneering papers which studied the
micro economic impact of legal reforms in India. The sample
consists of 15034 observations (borrowings from 1831 firms),
which correspond to loans sanctioned before the DRT Act date.
The dependent variable measures the probability that payment
on an invoice occurs within 180 days of the invoice date. Her
result showed that the establishment of DRT reduces
delinquency in loan repayment by 11 percent (1% significance
level) post DRT for loans above the amount of Rs 1 million.

IV Gaps in Literature
Rebecca (2006) paper used data from SOI corporate tax files
which records firms age only after 1993. Previous data on firm
location is not available for analysis. This would limit the
cross-state variation in the impact of Riegle-Neal State Act on
bank competition. Although this paper analyses the impact of a
Legal Act on credit allocation, it may not correctly reflect the
impact of the Act as the US banking market was competitive 8
before the Riegle-Neal Act was passed. Also the analysis in this
paper does not shed light on how banks competed with each-
other after the passage of Riegle-Neal Act.

Although the paper suggests that outside debt would be easier

to obtain if the firms assets are easily collateralizable. The
author did not analyze whether use of collateral reduces
information asymmetry between the competing banks and the
firm. Creditor’s rights may have differential impact on the
firms due to some firm-specific factors. This is not captured in
the existing literature. How does the entry of foreign banks New
Bank branches influence credit allocation in the domestic

7
Debt Recovery Tribunals (DRT) came into being in 1994 after the Debt Recovery Tribunals Act was passed on June
24th, 1993. DRTs were established to accelerate bank’s recovery of Non Performing Loans larger that Rs. 10,00,000/-.
8
Douglas Amendment Act (1956) allowed bank holding companies to own banks located in other states, if
the state permits them to do so.
market is not captured? Since most of the papers use
concentration ratio (e.g. Petersen and Rajan, 1995) to measure
competition between existing banks, the impact of entry of a
new bank in a region within the country remains unanswered.
This becomes important where there is branching restrictions
for foreign banks New Bank branches like we have in India.
Although it has been mentioned in the literature that
improvement in creditor’s rights would induce foreign banks
New Bank branches to extend credit allocation, but there has
been no empirical evidence to support the argument.

Visaria (2006), analyzed the implication of a legal Act on credit

allocation. Her analysis is limited to a private bank with loan
level data from Mumbai and Pune (Maharashtra). Also, DRT is
a quasi – judicial process as they are established by the
executive arm of the Government and falls under the purview of
Ministry of Finance, hence are not a part of the judiciary.
Moreover, the impact of DRT reduces as the first hearing takes
place only 180 days after summon has been issued. SARFAESI
Act is a stronger judicial process. Hence, we assume that its
impact would be more as compared to that of DRT.

To make the
Analyzing the trend of the capital structure of the firms from
1999-2006, I find that there is a fall in the proportion of
secured debt to total debt in the time period 2002-03 which
coincides with the SARFAESI Act (21 st June,2002). Also the
graph indicates that the change in the proportion of secured
debt to total asset is higher for the younger firms (firms less
than 5yrs , represented as Age 5 in the Exhibits below) than the
older firms(>10 yrs). Also, there is a decrement in the (total
debt/total assets) during the same time period, except for the
older firms (Age>10 yrs). All this indicates a policy decision
may have differential impact on the firms, which may defeat the
very objective of the regulatory body. This microeconomic, firm
level impact of a judicial process has not been analyzed in the
existing literature.
V.1 Objectives of the study
The objective of the thesis proposal would be to capture the firm –
level impact of SARFAESI on credit allocation. We propose to examine
the following objectives based on the synthesis from literature:

Objective 1:
Is there an improvement in credit access for the firms post
SARFAESI?
Rationale: Since SARFAESI gives the banks a right to sell the
collateral in case of a default, banks would be interested in extending
their lending activities. This is expected to be more prominent in the
districts were the foreign banks operate as theoretically the
asymmetry of information would be higher here compared to the
districts where only domestic banks operate. Hence we expect that
the ratio (debt/assets) to increase post SARFAESI.
The null hypothesis (H0) will be:
The ratio (external debts/assets) of the firms pre SARFAESI period is
less than or equal to the ratio (external debt/assets) of the firms in the
post SARFAESI period.

The above objective 1 will be examined industry-wise.

Objective 2:
How does the improvement in the creditor’s rights influence the
borrowing behavior of the firms?

Rationale: Creditor’s rights may bias the banks to liquidate the

collateral. Creditors, because of the nature of their claims, have a bias
towards liquidation, whereas firm owners, on the other hand, have a
bias towards continuation, arising from non-contractible private
benefits. This may deter the firms from taking loans against collateral
and look for other sources. That means we can expect that the ratio
(secured debt /assets) to decrease (or increase if firms welcome it)
after SARFAESI.

The Null Hypothesis (H0) can be stated as:

The ratio (secured debt/assets) should remain the same pre and post
SARFAESI periods.
We use the ratio (secured debt/assets) as a proxy for capital structure
of the firms. Following Rajan and Zingales (1995), we use
“tangibility” as a proxy for liquidation. The rationale is that the
tangible assets are easier for the banks to secure. Thus the sample is
divided on the basis of tangibility (average ratio of (secured
debt/assets) from 1999-2001)
we would examine objective 2 industry-wise separately across
tangible and intangible firm categories. We would also analyze the
impact of the Act on the age of the firm. New firms would have less
retained earnings and hence would require higher external debt as
compared to an established firm. But due to limited asset base, the
banks would be reluctant to extend credit to new firms. As some
industries have a higher tangibility compared to the others, we would
study the impact of SARFAESI on the capital structure of firms within
the same industry.

We also propose to incorporate other firm specific factors like, age of

incorporation, past profitability in our study.

Objective 3:
Does the introduction of SARFAESI in conjunction with the entry of
foreign banks in the domestic financial sector have significant effect
on the credit access to firms?

Null Hypothesis: The ratio (external debt/total debt) would remain

same for the firms in the districts where foreign banks entered the
market, pre and post SARFAESI.
To study the affect of credit access on the firms, we propose to
analyse the firms on the basis of:
 [(i)] Past Profitability
[(ii)] Age of the firm
[(iii)] Tangibility
Efforts will be made to extend the study industry-wise wherever it
is possible.

V.2 Data Choice and Variable Construction

The financial data related to the firms in the district is obtained from
the CMIE database. The district wise location of banks and their day
of establishments are obtained from Department of Economics and
Planning (DEAP), RBI. The reference period of the study would be
from 1999 to 2006 which includes the SARFAESI law enforcement
year (2002) in our assessment.

The primary database employed in the study is the Prowess (Release

3.0) generated and maintained by the Center for Monitoring the
Indian Economy (CMIE). This database is increasingly employed in
the literature for firm-level performance analysis on Indian industry
(Chibber and Majumdar 1999) and the performance of firms
affiliated to diversified business groups (Khanna and Palepu 2000,
Bertrand, Mehta, and Mullainathan 2002) amongst others. The
choice of variables and their definitions are given in exhibit 3 at the
end. Since our objective is to study whether the enforcement of legal
rights like SARFEASI reduces information asymmetry and improves
credit allocation by foreign banks and as there are branch restrictions
for foreign banks, we consider only those districts where the foreign
banks are present. We sort the data district wise and year wise based
on the year a foreign bank started its operation in the given district
(Exhibit 4).

The existing firms in those districts will be used for our study. Firms’
locations are determined primarily using their registered office
address as mentioned in CMIE. The time period of the sample is 1999-
2006 which is segregated as pre SARFAESI (1999-2001) and post
SARFAESI (2003-2006) Non-financial firms and firms with missing
data were filtered from the sample. Also, firms with (debt/asset) ratio
more than the 99 percentile were omitted to avoid extreme cases. The
final sample consists of 2611 firms. We would further segregate or
classify the data for group affiliation, age of establishment, market
listings and industry type (based on NIC classification). Pre and post
event (2002) would be analyzed to see if (secured debt /assets) has
improved or not.

Objective 1:

Does the introduction of SARFAESI in conjunction with the entry of

new banks in the district have a significant effect on the credit
access to firms?

Rationale:

As an increment in creditors’ rights would reduce the adverse

selection cost for the entrant bank and thus should encourage the
entry of new bank branches . If such is the case, then: (a) there
should be an increment of debt financing for the local firms and (b)
bank borrowing would be uniform across the industry. As the return
on invested capital (ROIC) is not the same for all the industrial
sectors, uninformed banks would be reluctant to extend credit to
those industries irrespective of the project viability and other firm-
level characteristics

Hypothesis:

Null Hypothesis: The ratio (external debt / total debt) would remain
the same for the firms in the districts where new banks entered the
market, pre and post SARFAESI.

How does the entry of new bank branches affect the firms, post
SARFAESI is modeled as

Yi,t= α + μi+δt + β1*NBt+β2*(NBt*Xi) + β3*Xi +εi,t

(MODEL I)
Where, Yit is debt ratios for each firm i in year t, NBt is a dummy
variable which is one if a new bank branches is present in the
district in the year t. “X” is the firm level past performance variable
like average ROA (ROAM9) calculated three years before a New bank
branches has entered the district. The firm fixed effect is μi. δt is
Year fixed effect (to capture any country-level time trend in
borrowing pattern of the firms may be due to any reforms or policy
change).

Objective 2

Does the introduction of SARFAESI (2002) in conjunction with the IBC

Act (2016) in the domestic financial sector have significant effect on
the credit access to firms?

Rationale:

Increment in creditors’ rights would reduce the adverse selection cost

for the bank and thus should encourage efficient credit allocation If
such is the case, then: (a) there should be an increment of debt
financing for the local firms, and (b)bank borrowing would be uniform
across industry

Hypothesis:

The ratio (external debt/total debt) would remain same for the firms in
the districts where new bank branches s entered the market, pre and
post IBC.

To study the effect of credit access on the firms, we propose to

analyse the firms on the basis of:

(a)Past Profitability (b)Age of the firm (c) Group Affiliation

9
Test were also done using ROIC (not shown here) with similar outcomes.
 (d)Tangibility

Yi,t= α+ µi + δt + α0IBC + α1D1+ α2D2+ β1IBC*D1 + β2

IBC*D2 + β3 Xi,t + εi,t

(MODEL II)

Where, SFI is the dummy for IBC Act (=1 for 2016 onwards 0
otherwise). Age of a firm (when a new bank branches entered for the
first time in the district in which the firm is located) is computed and
then classified into three age categories of <5 years, between 5 to 10
years and greater than 10 years. D1 and D2 are defined as D1=1 if
the age of a firm is <5 years and 0 otherwise and D2=1 if the age of
a firm is between 5 to 10 years else 0. X represents the control
variable.

Empirical Specification and Ordinary Least Square (OLS) Estimates:

How does the entry of banks affect the firms, post IBC is modeled as:

Yi,t= α + μi+δt + β1*IBCt+β2*(IBCt*Xi) + β3*Xi +εi,t

(MODEL I)

The theoretical literature indicates that collateral reduces

information asymmetry10 (Bester 1985, Besanko & Thakor 1987).
The model would be able to capture any change in the firm
borrowing pre and post Difference-in-Differences (DiD) with
Staggered Treatment: The paper introduces group-time average

10
Literature also suggests collateral usage reduces Information Asymmetry as it can be:

a) Used as signaling Instrument, similar to equity capital (Bester (1985), Besanko and Thakor (1987).
b) Resolve Moral Hazard problems like asset substitution , and inadequate effort supply (Berger and Udell
(1990), Boot, Thakor, and Udell (1990).
treatment effects for the setup to account for multiple time periods
and staggered treatment, accommodate covariate-dependent trends,
alternative comparison groups, and anticipatory behavior. in a
district. A set of firm-level dummies α1 would absorb any firm- level
differences in the firm’s usage of loans. The parameter (β1) in column
(1) is estimated as “within” firm change.

This would take care of the factor that any specific characteristics
that may change over time will not influence our findings. Also, time
fixed effect (δt) controls any change in lending patterns in India that
may be due to factors other than the entry of new bank branches
(E.g. Change in fiscal or Government policy) or country level reforms.
Column (1) β1 is estimated using the changes in the debt pattern of
the firms in these districts where a new bank branches has entered
after the passage of the SARFAESI Act, relative to the districts,
which never received a new bank branches during the period of
analysis (2002-2006).

That is, the primary control groups are all the firms placed in the
districts where no new bank branches s were present from 2002 –
[Link] complete dataset will be from 2002 to 2016.

However, column (1) specification does not suggest how the entry of
new bank branches, post- SARFAESI(IBC), differentially affected the
firms. Specifically, how past profitability (represented as ROAM: the
mean of last three years Return on Assets), Tangibility (measured as
ratio of fixed assets / total asset), Group Affiliation (firm affiliated to
Indian/Foreign groups) and Share listing (company listed in
BSE/NSE) impact firm’s access to credit.

This is obtained from a second specification equation which

comprises of an interaction term like, (NB*ROAM) from 2002- 2006.
In columns (2) – (5) coefficient β2 would describe the effect of having
higher past profitability before a new bank branches enters the
district. The inclusion of the interactive term (NB*ROAM) would
suggest that after the SARFAESI Act has been enacted, does the
firm’s past profitability matters for new bank branches s more (or
less) for credit access when a new bank branches enters the district.
This is under the assumptions that the past profitability is an
indicator of a firm’s potential, and we further assume that the effect
of new bank branches entry is local.

This specification would allow us to assess whether the entry of new

bank branches would result in credit relocation from less profitable
firms to more profitable firms (as suggested in the literature on
credit rationing). This would be indicated by β2 > 0.

A positive parameter (β2) would suggest that SARFAESI Act (IBC Act)
has failed to reduce the credit rationing due to information
asymmetry as suggested by Bester (1985); Besanko & Thakor
(1987) .

Some implicit assumptions need to be mentioned. We have assumed

that the effect of the new bank branches would be localized to the
registered address. In empirical works related to bank lending
relationships and distance in other countries have shown that
average distance lending bank and the firms are small (Petersen
and Rajan 2002). Also, even if the firms under consideration borrow
from banks outside the districts, this will increase the cost of
borrowings especially in a developing country like India.
Data Source and Variable Construction

 The financial data related to the firms in the district is obtained

from the CMIE database. The district wise location of banks
branches and their day of establishments are obtained from the
RBI website.

 The reference period of the study would be from 1999 to 2019

which includes the SARFAESI law enforcement year (2002) and
the Insolvency and Bankruptcy code (IBC) enforcement year
(2016) in our assessment. Data source will be from
Prowess(CMIE) and MCA.

 National Industry Classification (henceforth, NIC) provided by

the CSSO India.11

VI Research Methodology

Objective 1: We will sort the firms based on their industry

affiliation and then compute the ratio (external debt/ asset) pre
and post SARFAESI(IBC 2016/2020). We would then compare the
means using student’s t statistics to test the hypothesis. The
industry wise firm frequency is as shown in Exhibit 5:
Exhibit 5:
Industry wise Frequency of Firms
Industry Classification( A classified Number of Firms
cumulative listing) (based on data
availability across

11
retrieved from: [Link]
 2000-2019(

Plastics 119
Electronics 66
Machine Toolsachines 61
Services 134
Construction 121
Chemicals 124
Others 202
Textiles 327
Electricity generation 47
Paper 52
Automobile ancillaries 109
Drugs & pharmaceuticals 186
Computer software 243
Trading 451
Total 2611

Objective 2: We would segregate the sample into High

Tangibility (HT) and Low Tangibility
(LT) firms in each industry. We would examine the hypothesis
under Objective 2, pre and post SARFESI. We make use of
ANOVA Fixed Panel for our analysis.

Note: Some preliminary work at the aggregate level connected

to objectives 1 and 2 has already been done and provided in
exhibits 7, 8 and 9 in the appendix.
Objective 3: To study the influence of SARFAESI on the entry of
foreign banks New Banks branches we would consider the firms in
the districts where the foreign banks New Bank branches entered
for the first time post 2002 (Exhibit 6).This considers the base of
the study which will be used as the benchmank (reference) for further
assessment post IBC on 2016.
Exhibit 6:
Year wise, frequency distribution of firms in the districts where
the foreign Banks New Bank branches entered for the first time
since 2002 .Also shown are the firms in the nearby districts
where the foreign banks New Bank branches are absent.

Foreign bank Firms No foreign bank Firms

Yea entry (Number of with (Number of with
r Districts ) NFBr Districts ) NNFBr

20
02 1 32 1 17

20
03 5 453 5 233

20
04 5 342 5 133

20
05 6 382 6 265

20
06 5 287 5 221

Empirical Evidence
Since the objective is to determine, post IBCSARFAESI how does
the entry of foreign New Bankbank branches s affect the firms .
Wewe propose to use a model such as:

Yi,t= α + μi+δt + β1*NFBt+β2*(NFBt*Xi) + β3*Xi +εi,t…..........

(MODEL I)

Where, Yit is a measure of (external debt/Total assets) or

(secured debt/Total assets) for each firm i in year t. To meet
our objective, we incorporate an interaction term (NFBt*Xi) in
Model I where, NFBt is a dummy variable which is one if a
foreign New bank is present in the district in the year t. “X” is
the firm level past performance variable like average ROA/ROIC
calculated three years before a Foreign new bank has entered
the distinct. The firm fixed effect is captured by μ i . δt is a
dummy variable which is used to capture any country level time
trend in borrowing pattern of the firms. .This may be due to any
reforms or policy change which is common in an Emerging
market economy like India.

Our model I would allow us to model the theoretical argument

that entry of foreign bank may decrease in the credit access for
the local firms. β1 (>0) would indicate the presence of
information asymmetry. Since, we are analyzing the data post
SARFAESI(IBC), this should also indicate if collateral reduces
information asymmetry for the foreign banks.

In the proposed model I, the interaction term is incorporated in

the model to capture if factors, like profitability (ROA) of the
firm matters for credit access when a foreign bank enters the
market. This will also allow us to infer if the entry of foreign
bank is associated with a credit reallocation from a less
profitable (ROA) firm to a more profitable one (β 2 >0). The
values of past performance variable are averaged from 1999 to
2001 (pre SARFEASI).
Most of the similar models presented in the literature are used
for cross-country analysis. However, our proposed model would
be effective to capture within-country affect. Hence the value of
β1 will be attributed to the entry of foreign banks. Other India –
level policy change or reforms will be captured by the time
dummy.

Impact of IBC pre march 2020 when the SARFAESI on credit

allocation to the firms of different age categories will be
modeled as:
Yi,t= α+ µi + δt + α0D + α1D1+ α2D2+ β1DD1 + β2 *DD2 + β3 Xi,t +
εi,t…...(MODEL II)

Where, D is the dummy variable for SARFAESI IBC Act (=1 for
>202002 onwards 0 otherwise). Age of a firm (when a foreign
New bankbank branch entered for the first time in the district in
which the firm is located) is computed and then classified into
three age categories of <5 years, between 5 to 10 years and
greater than 10 years. We use two dummies D 1 and D2 defined
as D1=1 if the age of a firm is <5 years and 0 otherwise and
D2=1 if the age of a firm is between 5 to 10 years and 0
otherwise. The objective is to determine the impact of
SARFAESI on credit access for the firms under different age
groups after allowing for the impact of control variables (X).
This objective can also be examined using relevant cross-
section data and estimating model II.
[1.] Scope

 Four Service Sectors:

o Good representation of Services
o View from varied businesses and operational environments
o Ease of data collection
 Hospitality, Healthcare(Hospitals), Education and Banking
 The primary research will be restricted to Mumbai
o Professionals (Brand custodians and owners) and consumers
for a given service sector
 Survey with questionnaire as a tool
o Set of Experts12 in the field of branding
 Formal Interviews

12
Defined in section [Link] under ‘Sample Selection’ in Sampling Framework
[2.] Utility

 Help Service Brands understand the perception of Indian

consumers towards Ingredient Branding
 Help Service Brands differentiate from their competitors with the
help of Ingredient Branding
 Help Service Brands enhance their Brand Equity by the means of
Ingredient Branding
 Provide a Conceptual Model to Service Brands to effectively use
Ingredient Branding
 Help Service Brands spend their marketing investment on the right
alliances using Ingredient Branding

VII Research Contribution

Organizational distance in developing countries is greater as
compared to the developed ones. Also the cultural differences are
prominent. Hence, we argue that the influence of information
imperfection as an entry barrier would be more in India than, say
in US where foreign banks New Bank branches also comprises of the
other state banks. Since most of the studies are related to
developed economies, our study would address the issue for a
LDC, with empirical evidence from India.

Moreover, the theoretical literature assumes that the legal

environment is favorable for the bank to seek collateral to reduce
the disadvantage of information asymmetry. But the recent
literature related to the Law and finance has provided support for
the view that ownership protections, particularly in credit
markets, foster financial development by lowering the cost of
credit. The major function attributed to law, according to this
view, is that it empowers creditors to enforce their contracts and
thus must be taken into consideration. SARFEASI ACT (2002) and
the IBC (2016) provides us such an opportunity to study the impact
of such events on credit Financing . .

Foreign Banks New Bank branches would be allowed to operate in

India with no constraints, post 2009. This study would reflect on
the performance of these foreign banks New Bank branches with
respect to credit allocation in the districts they are present. This
would contribute to the literature by analyzing empirically how
competition between the banks due to the presence of foreign
banks New Bank branches determines how capital is allocated to
various firms that may be the future engines of growth. Hence, it
can help to understand competition and bank behavior in the
future when competition is expected to become more intense.
Although there is a significant body of literature emphasizing the
importance of creditor rights in credit market development (La Porta et
al., 1997; La Porta et al., 1998; Djankov et al., 2007; Haselmann et al.,
2010), ensuring the effective functioning of capital markets remains a
challenge, especially in developing economies with weaker legal
frameworks and lower institutional quality (Aghion et al., 2005). In these
economies, where contract enforcement is costly and time-consuming
(Gopalan et al., 2016; Vig, 2013), and where information asymmetry
often leads to cream skimming (Gromley, 2008; Sinha, 2012),

VIII Research Plan

Data collection and 2-3 Months (tentative)
tabulation
Analysis and preparation of 7-12 Months (tentative)
the results
Finalization of thesis 12 months (tentative)
report

Exhibit 3:
Variable definition (firms)
Source: CMIE (prowess) and Ace Equity -Author’s compilation.
 Exhibit 4:
Districts with Foreign banks (1990-06)