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
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.
Impact on VAT on plant and machinery
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
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.
Correlation between homeownership rates and homeonwership segregation
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 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.
Impact on lending of zombie and non-zombie firms during forbearance
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.