This paper uses a unique dataset with matched information at the firm-bank level covering 13,000 firms and 550 banks in 36 emerging and developing economies over 2012–20.

The analysis tests whether government-owned banks fulfill their social mandate by targeting credit constrained firms or firms that are more likely to generate positive externalities.The findings show that credit constrained firms are more likely to borrow from government-owned banks, and that this is especially the case in countries with good institutions. However, the paper does not find any evidence that government-owned banks target innovative firms or “green” firms. The findings show that in firms that borrow from government-owned banks, employment reacts less to business cycle conditions relative to firms that borrow from private banks. The paper further shows that employment is more stable in credit constrained firms that have a relationship with a government-owned banks with respect to credit constrained firms that borrow from a private bank.