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: Examining the impact of corporate governance on firms’ capital structure is empirically challenging. Using a non-standard implementation of a globally prescribed governance reform —mandatory formation of an audit committee — for large OTC firms in India, this paper examines the impact of governance reform on firms' capital structure and leverage dynamics. The governance reform tilts firms' capital structure toward equity and makes it financially flexible. Better-governed firms strategically lower leverage by reducing borrowing from capital-constrained bankers while partially offsetting this by borrowing from well-capitalized banks. Further, better-governed firms incorporate financial flexibility considerations as new debt is cheaper, transitory, and sourced from well-capitalized banks. Overall, the governance reform has value-enhancing implications as paid-up capital increases, firms grow, and investment selection improves.

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.