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With Viral Acharya, Abhiman Das, Prachi Mishra, and N. R. Prabhala

PRESENTATIONS: EFA 2016 | NEUDC 2018 | WFA 2018 | IFC 2018 | CUHK-RCFS 2019 

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.


Deposits of Indian public and private sector banks around the 2008 Lehman bankruptcy

With Ulrike Malmendier

Journal of Monetary Economics, 2022

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.

Homeownership segregation and homeownership rates

With S. K. Ritadhi and Abhay Aneja

Journal of Empirical Legal Studies, 2021

PRESENTATIONS: VAT conference 2019 organized by University of Michigan/Columbia/World Bank | NEUDC 2019 | Eighth Delhi Macroeconomics Workshop 2019

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.


Impact on VAT on plant and machinery

Cash is King: The Role of Financial Infrastructure in Digital Adoption

With Bhavya Agarwal and S. K. Ritadhi

The Review of Corporate Finance Studies, 2023

PRESENTATIONS: AEL Berlin 2019 | EEA 2019 (Withdrawn) | DIAL 2019 | NBER SI 2019 (Withdrawn) | AFA 2020 (Scheduled)​

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)

Impact of demonetization on digital transactions


With S. K. Ritadhi, Siddharth Vij, and Kate Waldock

Management Science, Revise and Resubmit

PRESENTATIONS: IIM Calcutta-NYU Stern India Research Conference 2019 | NSE-NYU conference 2019 | IMF 2019 | Delhi Winter School 2019 | ISI 2019 

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


Impact on non-performing loan recognition post bankruptcy laws

With Ulrike Malmendier

PRESENTATIONS: NBER SI 2015 | Becker Friedman Institute Conference 2016 | EFA 2017 | NBER-RFS 2021  

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.

Tract-level percentile transformation


PRESENTATIONS: ABFER 2017 | CFIC 2017 | CICF 2019 | EEA 2019 (Withdrawn) | University of Oregon Summer Conference 2019  

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.


Impact on percentage of zombies post the collateral reform

With Anusha Chari and Lakshita Jain

PRESENTATIONS: Norges Bank Conference (Oslo) 2019 | FDIC seminar series 2019 | Columbia 2019 

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.


Impact on lending of zombie and non-zombie firms during forbearance

With Kanika Mahajan and S. K. Ritadhi

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.


Impact on credit for private and public sector banks

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.

Number of MSAs having a fire sale


With Kaushalendra Kishore and Saurabh Roy

With Viral Acharya

We analyze performance of banks in India during 2007-09 to study the impact of government guarantees on bank vulnerability to a crisis. We find that vulnerable private-sector banks performed worse than safer banks; however, the opposite was true for state-owned banks. To explain this puzzling result we analyze deposit and lending growth. Vulnerable private-sector banks experienced deposit withdrawals and shortening of deposit maturity. In contrast, vulnerable state-owned banks grew their deposit base and increased loan advances, but at cheaper rates, and especially to politically important sectors. These results are consistent with greater market discipline on private-sector banks and lack thereof on state-owned banks which can access credit cheaply despite underperforming as they have access to stronger government guarantees and forbearance.

Uniform pricing policies are often instituted in the name of fairness. I study the unintended consequences of uniform pricing across regions in the US residential mortgage market, which is heavily influenced by the securitization policies of the government sponsored enterprises (GSEs). Exploiting variation in state foreclosure law at state borders I show that, controlling for borrower characteristics, GSE-securitized mortgage rates do not vary across regions. However, regression discontinuity and bunching estimates show that the GSEs "cherry-pick" the better risks leading to greater credit access in lender-friendly areas, but potentially unfairly denying credit access to marginal borrowers in borrower-friendly areas.


Impact of foreclosure law on marginal borrowers in high (low) lender rights areas. 

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