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Trade Credit and Bank Credit
The paper develops an empirical model to test the substitution of trade credit for bank credit using the annual financial data of 1,028 Indian manufacturing firms from 2011 to 2019. It further examines the impact of macroeconomic policy interventions on using these two financing sources.
The authors are truly obliged to anonymous reviewers for their valuable suggestions. They would also like to express their sincere gratitude to the editorial team of EPW for their timely support and guidance throughout the review process. The earlier version of this paper was presented at the Research Seminar of the School of Business Management, Narsee Monjee Institute of Management Studies (Deemed University). The authors are also grateful to Chandrima Sikdar and other participants for providing valuable suggestions.
The macroeconomic policy interventions, leading to a credit-rationing situation, force firms to adjust their financial policies to respond to the new emerging scenario. The plausible options for firms to maintain adequate firm-level liquidity in such situations inter alia include: (i) deferring non-priority capital investments (Michael and Michael 2010), (ii) raising capital to finance the ongoing projects by restructuring (Bokpin 2009), (iii) increasing internal accruals by reducing dividend payout (Bhat et al 2021), and (iv) substituting the available sources of short- and long-term financing. This paper attempts to understand the dynamics of substitution of trade credit and bank credit as short-term sources of firms’ financing during the credit-rationing scenario faced by firms post macroeconomic policy interventions.
Bank credit and trade credit are two primary sources to meet the working capital requirements of firms and constitute a significant part of their total assets and current assets. The average trade credit and bank credit of 1,028 Indian manufacturing firms for the years 2011 to 2019 represent 13% and 20% of the total assets, respectively, and 28% and 48% of current assets, respectively. The bank credit and trade credit together account for one-third of the total assets and three-fourths of the current assets of the manufacturing firms. As seen in Figure 1 (p 51), the aggregate trade credit as a percentage of the total short-term credit of all firms has increased post 2016.
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