Do Interest Rate Changes Effect Small Business Lending in India and South Africa?

In this paper, we investigate how small business (SME) lending responds to fluctuations in interest rates in two major BRICS+ economies, India and South Africa, where we focus specifically on the monetary transmission mechanism of bank lending. By utilising a panel dataset from 2010 to 2022 of commercial banks in both of the economies, we conduct a fixed effect regression in order to effectively identify the responsiveness of lending to any changes in policy rates, and by incorporating different macroeconomic and bank-specific variables in our analysis, we are also able to conduct an analysis on the interactions with monetary policy – allowing us to understand the variations in responses to lending. Our findings indicate that there exist several differences in not only financial market systems, but regulations and credibility of central banks as well, given that SME lending is seen to be much more sensitive/elastic to interest rate changes in South Africa than in India. Crucially, we see how lending for SMEs in India is less elastic as a result of government lending programs and the prevalence of public sector banking systems. Overall, our results demonstrate that having a wider understanding of the institutional context is essential in observing the effectiveness of monetary policy, and also highlights the need for tailored policy implications that can improve credit access for SMEs, especially since this gap could increase with the nature of emerging markets.