Bank Cleanups, Capitalization and Lending: Evidence from India

The Review of Financial Studies, 2020

56 Pages Posted: 9 Sep 2020 Last revised: 27 May 2021

See all articles by Yakshup Chopra

Yakshup Chopra

Washington University in St. Louis - John M. Olin School of Business

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Prasanna L. Tantri

Indian School of Business

Date Written: July 31, 2020

Abstract

We examine the Indian bank asset quality review, which doubled the declared loan delinquency rate. Relative economic stability during the exercise and the absence of a capital backstop together make it unique. We find that the expected reduction in information asymmetry does not automatically lead to the recapitalization of banks by markets. The consequent undercapitalization leads to underinvestment and risk-shifting through zombie lending. The impact flows to the real economy through borrowers, including shadow banks, and adversely impacts growth. These findings show that bank cleanup exercises not accompanied by policies aimed at recapitalization may be insufficient even during normal times.

Keywords: AQR, Lending, Capital Infusion, Zombie Firms, Contagion

JEL Classification: E58, G21, G23, G28

Suggested Citation

Chopra, Yakshup and Subramanian, Krishnamurthy and Tantri, Prasanna L., Bank Cleanups, Capitalization and Lending: Evidence from India (July 31, 2020). The Review of Financial Studies, 2020, Available at SSRN: https://ssrn.com/abstract=3683522

Yakshup Chopra (Contact Author)

Washington University in St. Louis - John M. Olin School of Business ( email )

St. Louis, MO 63130
United States

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Prasanna L. Tantri

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India
9160099959 (Phone)

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