This paper endeavors to find out the determinants of bank finance to corporates in India. A panel data analysis, more specifically, the Generalized Method of Moments (GMM) technique, has been used to find out the factors which affect corporate borrowings from banks in India. It has been found that variables like size of the company, debt to equity ratio are positively, and variables like return on assets, Tobin’s Q ratio and Altman’s Z-score are negatively related to the bank finance in the case of Indian corporate sector.

Bank finance is a cheaper source of finance for companies not only because it is less expensive in terms of issuance cost and risk, but also because it allows ample tax benefits. Beside these financial considerations, nonfinancial factors also explain the utilitarian use of bank borrowings: It does not disturb the controlling power of the existing owners and affords flexibilities in the financial structure. Due to the asymmetric information in the market, firms with higher information use bank debt due to better monitoring power (Mihov, 2002). In the presence of the adverse selection problem, when the firms’ stocks are undervalued, they prefer bank borrowings over other finances (Hadlock and James, 2002). During the recent period, it has been found that in countries like USA and UK, the deficits of the corporate sector are generally financed by bank borrowings. In India too, commercial banks play a major role in supplying external debt to the corporate sector. They provide finance to the firms irrespective of the size, age and the nature of the business. Such banks work out to 25-30% of the total sources of finance of the corporate sector in the recent times.

Notwithstanding its significance, not much research has been effectuated on bank borrowings in India. The absence of research is noticeable particularly in respect of the advanced empirical modelling and testing of the behavior of bank borrowings during the period of liberalization. It is, therefore, necessary to initiate a fresh empirical study of bank borrowings in India so as to consolidate our understanding of its behavior under the changed circumstances. The objective of the research effort is to fill in the gaps by undertaking a comprehensive empirical study of the behavior of bank borrowings in India over a period of seven years. This study specifically essays the various factors which lead to bank finance in companies.