Career Concerns and Distortion in Credit Uptake: Evidence from India’s Lead Bank Scheme

Authors: Samarth Gupta


In the Lead Bank Scheme of India, a public sector bank, known as the Lead Bank of the district, reduces bottlenecks in financial service delivery. Another public sector bank, known as the Convenor Bank of the state, monitors the effort of Lead Banks across districts within a state. Given this organizational design, for some districts, defined as aligned districts, Lead and Convenor banks fall within the boundary of the same firm. I find that in aligned districts credit uptake is higher by 21%, consistent with higher effort by Lead Bank personnel owing to lower monitoring costs (Williamson, 1981) and higher career concerns (Holmstrom and Roberts, 1998) within a firm. I conduct two tests to identify the impact of alignment within a district on financial inclusion outcomes. First, using a plausibly exogenous (to district characteristics) change in alignment status of a district, I find that credit increases by nearly 28% when a district becomes aligned. Further, after an exogenous negative income shock of bad rainfall, saving withdrawals are lower in aligned districts, consistent with higher credit availability (Eswaran and Kotwal, 1990). The results show how organizational pressure within commercial banks in India may distort credit lending across districts.