19 restrictiveness in monetary policy,<sup>18</sup> high inflation, a new business turnover tax on interbank transactions, and the mounting operational costs of government-owned baniks (see Lindrer. et al., 1986, and Datta, 1983, for details). Finally, as noted above, even though total credit to the private sector increased considerably, the government continued to utilize well over a third of total institutional savings through its authority over nonbank financial institutions. The interest rate outcome would have been different if measures had been taken to redress this compartmentalization in the financial markets.

# 4.4 Efficiency of Credit Allocation

The analysis in the previous section provides empirical support for the view that financial reform, by augmenting the volume of institutional credit, played an important role in facilitating supply-side adjustment in the economy. This section extends that analysis by focusing on the pattern of credit allocation. In light of the theoretical discussion in section 2, we focus on two aspects of the credit allocation process, namely, borrowers' access to institutional credit and the degree of dispersion in the cost of credit for various types of borrowing.

There are no time series data on the distribution of institutional credit at the firm level. The available survey-based evidence, however, points to an increase in the number of recipients of credit from the banking system. For instance, in a comparison of the financial structure of small-scale enterprises in 1977 and 1986, Islam and Romijn (1988) found that the percentage of firms which had obtained financial support during the period fror the banking system increased from 13 percent to 24 percent. The findings of the Consumer Finances Survey of the Central Bank relating to the distribution of household borrowing by source are consistent with this pattern (Table 17). According to this source, the institutional share in total household borrowing increased from 20.2 percent in 1973 to 25.3 percent in 1978-79 and 40.1 percent in 1981-2. This overall increase occurred despite the shrinking of subsidized institutional lending to the agricultural sector following the termination of the comprehensive credit scheme.<sup>19</sup> At the disaggregated level, the sharpest increase occurred in borrowing for industrial activities. There does not seem to have been a rapid increase, as is popularly alleged, in borrowing for consumption. As theory predicts, various elements of financial reform, such as the greater availability of loanable funds, removal of credit rationing, and a more flexible interest rate structure might have contributed to the increased availability of institutional credit. Whatever the underlying reason may 18. The level of statutory reserve requirement on commercial bank deposit was increased in mid-1981 and again in November 1983, in response to aggravating macroeconomic imbalance in the economy.. As a result, the weighted average of reserve requiremenit on all deposits increased from 7.4: to 8.1F in 1981 and 10.5' in 1094.

19. Following this step the share (if avri:ultuLal credit in total hank credit to private sector declined from 15. percent in 1977 to 8.2 in 1982.