Econometrics

Foreign banks in developing countries are often found to indulge in "cream skimming," a lending strategy that targets only wealthy segments of the credit market and excludes small and marginal borrowers from the general pool of borrowers. This paper attempts to investigate whether lending patterns of foreign banks in urban regions of Indian states are indicative of such practices. Using credit data on urban regions of 21 states of India for 1999-2011, this paper finds empirical evidence of cream skimming by foreign banks in India.

The debate on causality in the social sciences in general, and economics in particular, can hardly be regarded as settled. A vital point which seems to have escaped the debate is that causal laws and economic processes themselves can change, as economic institutions evolve. Thus the standard econometric methodology of verifying and refuting hypotheses from observed realisations of time series data is seriously at fault. What is needed is a meta-theory, which also encompasses the effects of institutional change on economic processes. The search for such a theory is likely to prove elusive, but as economics attempts to push beyond its conventional frontiers of postulating static theories it is very likely to lose much of its formal mathematical seductiveness and take on more the appearance of a narrative-descriptive science. Many may regard this as retrogression, but at least a few will welcome it as a step taking our subject closer to the vision of its founding fathers such as Smith, Malthus, Ricardo and Keynes.