Deposit outflows from private sector banks in 2008-09

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

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

We develop micro-level evidence on the real effects of a large-scale flight to safety by bank depositors. Private banks in India, which had little exposure to US experienced sudden withdrawals of deposits after the 2008 financial crisis in the US, reflecting pure panic of depositors. We quantify, characterize, and examine the lending consequences of the deposit flight using granular branch-level data on deposits. Deposit flights are local as they transfer resources from private to public sector banks in the same district. Though deposit flights are concentrated in a few districts, geographically distant districts witness significant credit reallocation as the panic flows are propagated through the banks' internal capital networks. These loans eventually underperform. Firms with pre-existing relationships to affected public sector banks increase investment, but to potentially unproductive technologies possibly explaining the loan underperformance. Flights to safety which reallocate deposits within local markets can transform the structure of bank assets and liabilities across geographically distant markets.

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Stock market reaction of Indian public and private sector banks around the 2008 Lehman bankruptcy

With Ulrike Malmendier

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

We document that housing policies aimed at increasing homeownership and reducing disparities can have adverse consequences, arising from sorting and deteriorating place-based factors. Exploiting variation in the ease of mortgage financing and targeting of underserved neighborhoods in the 1992 GSE Act, we show that, while Black homeownership increased in targeted neighborhoods, white families moved out, especially when mortgage financing became more accessible in the surrounding areas. Segregation increased and upward mobility deteriorated among low-income Black families and among those low-income white families who remained. We identify declining house prices, education spending, and school quality in targeted areas as plausible channels.

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Correlation between homeownership rates and homeonwership segregation

With S. K. Ritadhi and Abhay Aneja

Accepted, Journal of Empirical Legal Studies

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.

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Impact on VAT on plant and machinery

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

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

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Impact on non-performing loan recognition post bankruptcy laws

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.

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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 during the global financial crisis allowed banks to lower capital provisioning requirements for loans under temporary liquidity stress and provides a policy experiment to examine credit allocation efficiency. Matched bank-firm data from India show that stressed banks also significantly increased lending to low-solvency firms. Moreover, in industries and bank-portfolios with high proportions of zombie firms, credit was reallocated away from solvent to zombie firms, a pattern that persists even after forbearance is withdrawn. Our findings suggest that forbearance provided banks with an incentive to hide true asset quality, and a license to engage in regulatory arbitrage \textemdash the build-up of stressed assets in India's predominantly state-owned banking system is consistent with accounting subterfuge.

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

Homeownership Segregation

With Ulrike Malmendier

This paper argues that restrictive housing regulations since the 1970s have increased the segregation of low-income homeowners, which in turn has been detrimental to their children's upward mobility. We first introduce a new measure of the separation between homeowners and renters. We show that higher homeownership segregation lowers upward mobility among low-income families, instrumenting homeownership segregation in 2000 with the planned portion of the national interstate highway in 1947. Effects are driven by the segregation of rich homeowners from poor households. Segregation (and not the level) of single-family detached homes explain homeownership segregation patterns in a CZ. We then link homeownership segregation to restrictive housing regulations by showing that commuting zones with higher homeownership segregation are more likely to have restrictive land-use patterns in 2006. We also document stronger citizen opposition to new housing due to concerns of school crowding in these CZs. Finally, Federal Fair Housing Act lawsuits are significantly more prevalent in CZs with higher homeownership segregation in 2000, indicating the greater discriminatory housing practices in these CZs. Our evidence is consistent with a mechanism where more restrictive housing regulations since the 1970s prevent lower-income households from moving to better neighborhoods. 

Homeownership segregation and homeownership rates

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.