Firm financing in India: recent trends and factors

Using balance sheet information for nearly 6,000 firms between 1994-2003, this study investigates recent firm financing patterns in India. The paper documents the overall use of debt and, in particular, the role of bank financing (short-term and long-term), trade credit, intrabusiness group borrowing and foreign financing. The study examines financing patterns over time and explores differences across firms by sector, age, ownership type, export orientation, and, in particular, size. In terms of trends, we find that while debt to asset ratios have been relatively stable, nominal debt growth has slowed down in recent years. At the same time, firms' repayment capacity, as measured by the interest coverage ratio has exhibited a U-shaped pattern falling during 1997-99 and recovering in recent years. Throughout the period of study, bank financing as a share of total debt has increased, while borrowing from non-bank financial institutions fell sharply. In terms of differences across firms, the most robust finding is that debt levels increase with firm size. Smaller firms have especially less debt relative to larger firms if they are young (below 10 years since incorporation), if they are in the manufacturing sector, and if they are located in Southern India. Furthermore, while the ratio of debt to assets has been relatively stable for large firms, we observe a significant decline for smaller firms. Overall, the findings presented in the paper provide suggestive (but not definite) evidence of stronger credit constraints for smaller firms.