Shadow Banks on the Rise: Evidence Across Market Segments
with Kim Fe Cramer, Pulak Ghosh, and Nishant Vats.
Conditionally Accepted, Journal of Financial Economics (2026).
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Abstract
This paper examines the comparative advantages of shadow banks using novel credit bureau data on 653 million formal retail loans in India. Proxying credit demand shocks with weather variation, we show that Fintechs respond more than other lenders in uncollateralized markets. Conversely, non-Fintech shadow banks are more responsive in collateralized markets. Both show stronger responses for borrowers with low credit scores or no credit history. Exploiting the geographic heterogeneity in the adoption of digital payments technology we document the importance of technology for Fintechs. Leveraging four natural experiments across lenders, time, and products, we establish the importance of lax regulation and physical presence for non-Fintech shadow banks. Our results suggest that the dominant comparative advantages of shadow banks differ across market segments.
Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks
with Viral Acharya, Abhiman Das, Prachi Mishra, and N. R. Prabhala.
Revise & Resubmit, Journal of Financial Economics.
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We study a bank run in India in which private bank branches experience sudden and considerable loss of deposits that seek safety in state-owned public sector banks (PSBs). We trace the consequences of this reallocation using granular data on bank-firm relationships and branch balance sheets. The flight to safety is not a flight to quality. Lending shrinks and credit quality improves at the run banks but worsens at the recipient PSBs. The effects are pronounced in weaker PSBs, the ones more likely to exploit the shelter of state ownership. The resource reallocation is inefficient in the aggregate.
Unearthing Zombies
with S. K. Ritadhi, Siddharth Vij, and Kate Waldock.
Management Science, 71(9), 7840–7862 (2025).
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The secular rise of "zombie" borrowers, insolvent firms sustained by continued extension of credit by complicit banks, has been a source of concern for mature and emerging economies alike. Using supervisory data on the universe of large bank-borrower relationships in India, we introduce a novel method for identifying zombies. Although there was widespread non-disclosure of zombies in India in 2014, the beginning of the sample period, there have been major improvements since. We examine changes in zombie reporting around two key policy changes: an overhaul of the bankruptcy code and a regulatory intervention removing lender discretion in bad loan recognition. Increases in reporting were modest after the bankruptcy reform but there was a sizable jump in the recognition of zombies after the regulatory intervention. Post-intervention results show that lending has been reallocated to large, healthy borrowers. However, under-reporting still exists, particularly among public-sector banks. Overall, our results indicate that regulatory action might be necessary, above and beyond bankruptcy reform, to target zombie lending
Zombie Lending Due to the Fear of Fire Sales
with Kaushalendra Kishore, and Saurabh Roy.
Journal of Corporate Finance (2025).
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This paper provides evidence of a new cost of fire sales: zombie lending by banks. Banks with high market share are more likely to internalize the negative spillovers of falling collateral prices during a fire sale. To prevent prices from falling further during a fire sale, these banks do not liquidate defaulted firms and instead give zombie loans to keep them alive. Using structural breaks in real estate prices to identify periods of fire sales in different MSAs, we provide evidence that banks with high market share give zombie loans to firms with relatively higher real estate assets during a fire sale. Further, congestion due to zombie firms in an industry reduces the investment and profitability of healthier firms. Overall, we highlight a new mechanism for zombie lending resulting from reduced collateral liquidation in markets prone to fire sales.
Financial Repression, Deposit Rate Deregulation, and Bank Market Power
with Yogeshwar Bharat, and Subhadeep Halder.
Working Paper.
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Abstract
Mandating low deposit rates, a form of financial repression, allows banks to raise deposits cheaply and makes investment in government securities profitable but limits credit access. Using regulatory data, we exploit India’s 2011 deregulation of savings deposit rates to show that deposit rates increase after deregulation, more so for banks with low market power — consequently, deposits increase and deposit maturity contracts. These banks shift from low-yielding government securities to loans, including personal, services, and small business loans. Loan maturity shortens to match deposit-maturity shortening. A structural model demonstrates that high-market power banks restrain deposit growth. Deregulation improves financial intermediation, but banks’ market power limits gains.
Bank and NBFI Inter-Linkages: Anatomy of a Non-Banking Liquidity Shock
with K. M. Neelima, and Sonalika Sinha.
In-Principle Accepted, Review of Corporate Finance Studies (2026).
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The Unholy Trinity: Regulatory Forbearance, Government-Owned Banks, and Zombie Firms
with Anusha Chari, and Lakshita Jain.
Revise & Resubmit, European Economic Review.
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Abstract
Asset quality forbearance to alleviate loans under crisis-induced liquidity stress adversely impacts the allocative efficiency of credit. Bank-firm-matched data from India reveal that government-owned banks increased lending to firms facing solvency pressures relative to private banks. Zombie lending crowded out productive lending, especially in industries and bank portfolios with high proportions of failing firms, controlling for demand-side factors. Reduced loan loss provisioning requirements facilitated regulatory arbitrage by banks through asset-risk reclassification, hiding true asset quality. Forbearance manifested fiscal dominance allowing the sovereign to postpone costly recapitalization— an implicit subsidy that facilitated the buildup of stressed assets in the banking system.
Resolving Zombie Lending with Collateral Reform
with Saurabh Das.
Working Paper (2024).
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Zombie lending, defined as lending to otherwise insolvent borrowers, misallocates resources and hinders economic growth. This paper exploits a 2002 collateral reform in India as a natural experiment to show that improving the process of resolving bad loans can reduce the share of credit and capital allocated to zombie borrowers. Post-reform credit to distressed borrowers contracts due to a decline in continued lending to zombie borrowers, which subsequently cut investment. Credit to healthy firms increases that then expand investment. Allocative efficiency improves by 18.7%, with 94% of the improvement attributable to credit reallocation by lenders from zombie to non-zombie borrowers.
Banking the Underbanked: Capital Investment and Credit-Constrained Firms
with S. K. Ritadhi, and Kanika Mahajan.
Working Paper (2026).
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Inadequate banking infrastructure can exacerbate inequalities across firms. We exploit a place-based policy at scale – India’s nationwide bank expansion policy in 2005 that incentivized banks to open branches in “underbanked” districts – and use a regression discontinuity design to identify substantial increases in capital expenditures and credit growth of manufacturing establishments post-intervention. We find establishments most likely to be credit constrained i.e., small, young and those not publicly listed to drive these effects. Increased physical proximity of lenders to small, informationally opaque borrowers, and the hiring of bank officers are the primary mechanisms explaining the uptick in capital spending.
Banking Catch-22? Trading off Mark-to-Market and Default Risk
with Karthik Narayan, and Akshat Singh.
Working Paper (2023).
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Monetary Policy Transmission through the External Benchmark Lending Rate (EBLR)
with Avijit Bansal, Marti Subramanyam, and Gautham Udupa.
Work in Progress.
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Digital Infrastructure & Inclusion
How the design and adoption of digital infrastructure shape access and credit allocation.
Cash is King: The Role of Financial Infrastructure in Digital Adoption
with Bhavya Agarwal, and S. K. Ritadhi.
Review of Corporate Finance Studies, 132 (2021): 103631.
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This paper examines whether a one-time, extensive, but temporary shock to cash supply can affect the adoption of digital payments. We exploit the 2016 demonetization episode in India, which overnight discontinued 86% of cash in circulation. Using novel administrative data from retail debit card transactions, we identify a 12% increase in digital payments in areas adversely affected by the cash shortage, which persisted well after the restoration of cash supply. Examining mechanisms, we find a limited role for social networks and stronger support for learning by doing. Further, information frictions hinder the immediate adoption of digital payments. (JEL E5, 023)
Breaking Barriers to Financial Access: Cross-Platform Digital Payments and Credit Markets
with Shashwat Alok, Pulak Ghosh, Nirupama Kulkarni, and Manju Puri.
Working Paper (2025)
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Does the ability to generate verifiable digital financial histories, with customers having data-sharing rights, improve credit access? We answer this using India’s launch of an Open-Banking based public digital payment infrastructure (UPI). Using rarely available data on the universe of consumer loans we show credit increases by both fintechs (new entrants) and banks (incumbents), on the intensive and extensive margin, including increased credit to subprime and new-to-credit customers. We show several mechanisms at play: low-cost internet improves credit access, lenders weigh in digital histories, and digital payments with Open Banking effectively complement first-time bank accounts enabling access to formal credit.
Interoperable Payment Infrastructure and Retail Investment
with Meghana Ayyagari and Pulak Ghosh.
Working Paper (2025)
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Algorithmic Bias with Data Scarcity: Evidence from India
with Abhiman Das, Aarushi Kalra, and Advait Moharir.
Working Paper (2025)
Related theme: Real Estate & Credit Markets.
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Real Estate & Credit Markets
How the structure and regulation of housing markets shape access to credit and lending patterns.
Homeownership Segregation
with Ulrike Malmendier.
Journal of Monetary Economics (2022).
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Homeownership is considered an essential part of the ``American Dream'' and forms the foundation of upward mobility. We show that the upward mobility of children from low-income families is not predicted by homeownership rates, but by homeownership segregation. Higher residential segregation between homeowners and renters predicts lower upward mobility of children from low-income families, while not affecting high-income families. We hypothesize the 1968 Fair Housing Act preserved homeownership segregation in CZs since the 1970s, and feature more land-use regulation even today. Channels mediating the effect of homeownership on upward mobility include income segregation, racial segregation, school segregation, and commuting times.
Mortgage Policies, Racial Sorting, and Upward Mobility
with Ulrike Malmendier.
Working Paper (2025).
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For decades, US housing policies have aimed to increase homeownership and reduce racial disparities, but their success has been limited. We argue that the endogenous sorting of residents in response to place-based policies and deteriorating place-based factors help explain the lack of positive outcomes. In the context of the 1992 GSE Act, we show that, after the introduction of targeted support for mortgage financing in specific neighborhoods, Black homeownership mildly increased in those census tracts, but white homeownership strongly decreased. The sorting effect is most prevalent in tracts where, during the same time period, mortgage financing became more accessible in nearby census tracts. Children from low-income families who remain in the targeted areas display significantly lower upward mobility. We identify declining house prices, reduced education spending, and lower school quality as plausible channels.
Disparities in Home Loans: Evidence from India
with Prashant Bharadway, Abhiman Das, and Niranjan Kumar.
Working Paper (2025).
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Creative Destruction: Tunnelling and Developer Exits in India
with Sahil Gandhi, and Amartya Rajamalla
Work in Progress
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Additional Research
Consumption Tax Reform and the Real Economy: Evidence from India's VAT Adoption
with S. K. Ritadhi, and Abhay Aneja
Journal of Empirical Legal Studies (2021).
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We study the impact of consumption tax reform on firm capital and productivity by examining the replacement of the pre-existing sales tax with the value-added tax (VAT) in India. VAT allowed firms to offset their tax liability with VAT paid on capital inputs, effectively reducing capital costs. Exploiting the staggered adoption of VAT across states, we show that exposure to VAT increases firm capital. Effects are driven by the most financially constrained firms, with a 26\% increase in capital. As a result, the firm productivity of financially constrained firms improves post VAT. Our findings suggest that consumption tax reforms can stimulate investment and productivity of financially constrained firms.
Consumption Dispersion, Jati Networks, and Risk-Sharing in India
with Bishmay Barik, Satyajit Chatterjee, and Ashwini Deshpande
Work in Progress
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Abstract
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