Tuesday, January 10, 2012

Colombia Second-tier Government Banks and Firm Performance Micro-Evidence

Government-owned development banks play the crucial role of channeling public funds to productive activities that, even if promising, may be rationed from credit access and may not flourish in the absence of such credit. Particularly interesting is the case of second-tier public banks. Rather than lending directly to firms, these banks lend resources to financial intermediaries (first-tier), which eventually lend the resources to firms. In this setting, secondtier banks not only expand credit supply by making more resources available, but may also provide resources at low costs and with flexible conditions that the intermediaries may then pass on to the final recipients of loans. Their activity is, therefore, expected to relax the constraints that prevent some firms from accessing credit, either because it is not available at all or because it is not available at costs that these firms can afford.

Such credit by second-tier development banks has potential advantages when compared with direct public lending and other forms of direct public support to business. First, second-tier credit is aimed at addressing market failures that limit access to credit, particularly for micro, small, and medium-sized enterprises (MSMEs). Second, because commercial banks and other private financial institutions eventually take on default risks, one could expect them to
adequately evaluate the quality of different projects and to separate those that are potentially profitable from those that are not. Resources should thus be more likely assigned to better uses than when governments provide direct support to businesses, sometimes assigning it on the basis of lobbying by potential beneficiaries. In fact, studies have found no effects or even negative
effects on economic performance when government-owned banks lend directly. Previous analyses also show evidence that such effects may relate to allocation of direct government loans according to political criteria.

Despite the potential gains from credit by second-tier development banks, little is known about their actual impact. This study is aimed at partially filling that gap by analyzing the impacts of lending activity of Bancoldex, the Colombian second-tier development bank, on the performance of manufacturing firms over the last decade. A companion paper studies Bancoldex’s impacts on the characteristics of credit used at the firm level (Eslava, Maffioli, and
Meléndez, 2011).

First established in 1992 to promote exports, Bancoldex became the Colombia’s development bank in 2003, taking over general development policy responsibilities that were previously held by the development agency IFI (now nonexistent). Bancoldex’s activities concentrate on second-tier lending: all of its credit resources are channeled through other financial or nonfinancial intermediaries.

To explore the effects of loans funded by Bancoldex on firm performance, we use microlevel data for all manufacturing establishments with 10 or more employees from 1997 through 2007 matched with data on Bancoldex credit recipients from 2000 through 2007. This allows us to study the effects of different types of Bancoldex loans on different aspects of firm performance.

After correcting for selection biases, we find that using Bancoldex loans increases firms’ output, employment, investment, and productivity. Moreover, these effects grow with increases in amounts borrowed. While loans intended for long-term purposes are found to have positive impacts on output, investment, and productivity, short-term loans help improve performance in
other dimensions, particularly with respect to exports.

Our study is, to the extent of our knowledge, the first econometric assessment of the impact of credit from second-tier development banks on firm performance. Our findings contribute to the understanding of how different ways of channeling public resources to the business sector can have different effects. In contrast to the negative or inconclusive findings of previous studies on the impact of direct lending by the government, our results suggest that second-tier banking can foster productive activities, especially if resources are targeted to funding long-term projects that may otherwise be hard to finance in a tight financial market.

The paper is organized as follows. Section 2 describes Bancoldex and its financing activity. Section 3 reviews previous studies on the subject. Section 4 introduces the data used in our evaluation, and Section 5 discusses our empirical approach. Section 6 presents the results of our study, while Section 7 discusses those results in the light of the existing literature and
concludes this paper.

Marcela Eslava. Alessandro Maffioli. Marcela Meléndez. Capital Markets and Financial Institutions Division (IFD/CMF). IDB WORKING PAPER SERIES No. IDB-WP-294. Inter-American Development Bank. January 2012


No comments:

Post a Comment