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.

Abstract: Using establishment-level data, we examine the impact of the Indian government’s employment guarantee program on labor and firm behavior. We exploit the staggered implementation of the program for identification and find that the program led to a 10% reduction in the permanent workforce in firms. Firms responded to the adverse labor-supply shock by resorting to increased mechanization. This significantly increased the firms’ cost of production, leading to a decline in net profits and productivity. These effects manifested primarily in firms paying low wages, firms having low labor productivity and greater sales volatility, and firms located in states with pro-employer labor regulations.

Abstract: Does improvement in corporate governance make firms' capital structure more financially flexible? If so, does the lender's health play any role? Using discontinuities from a novel regulatory reform that improved shareholder oversight for large OTC firms (``private firm"), I document that improved corporate governance leads to lower net debt issuance, lower firm leverage, and higher equity issuance. Contrary to the hypothesis that strengthening shareholder oversight increases agency cost of debt, I find that new debt is sourced from well-capitalized banks with lower collateral requirements and lenders find overall improvement in borrower's debt repayment. Consistent with improved corporate governance substituting the disciplining role of debt, better corporate governance improves capital allocation by reducing value-destroying investments. The investment efficiency improves as new investments are less susceptible to hitting roadblocks. Overall, this paper provides evidence that improvement in governance makes firms stable, financially flexible, and less prone to credit supply shocks, as their capital structure tilts towards equity, and their new debt is cheaper and sourced from well-capitalized banks.

Abstract: We ask whether regulatory forbearance on bank loan loss recognition contributes to deterioration in the governance of borrowing firms. More exposed firms experience a reduction in board independence and external monitoring, an increase in management compensation including transactions with connected entities, an increase in board similarity and CEO duality, and a change in auditors. Their investment in shareholder value-destroying unrelated projects, which show a higher tendency to stall, increases. Thus, the ability of a borrowing firm’s management to benefit from the forbearance increases its influence within the firm and dilutes governance controls. We highlight a hitherto unexplored cost of forbearance.

Abstract: We provide empirical evidence from India’s PMJDY program, a “big bang” supply shock that gives bank accounts to virtually all of its 280 million unbanked. Proprietary data from individual bank account statements shows that there is significant uptake, usage, usage growth, and balance accumulation in PMJDY accounts. Activity levels increase over time and converge towards those in non-PMJDY accounts although PMJDY account holders are poorer, unfamiliar with banking, and undergo no literacy training. The results suggest that the 2 billion unbanked around the world have unmet demand for banking or that banking supply can stimulate its own demand.