Indirect Evergreening Using Related Parties: Evidence From India - with Sriniwas Mahapatro and Prasanna Tantri

Published in Journal of Financial and Quantitative Analysis (JFQA)

Abstract: We identify a novel way of evergreening loans in India. A low-quality bank lends to a related party of an insolvent borrower, and the loan recipient transfers the funds to the insolvent borrower using internal capital markets. Incremental investments, interest rates charged, and loan delinquency rates collectively indicate evergreening. These loans are unlikely to represent arm’s length transactions or rescue of troubled related firms by stronger firms to prevent group-wide spillover effects. Indirect evergreening is less likely to be detected by regulatory audits. It has significant real consequences at the firm and industry levels.

Preventing Defaults In Response to Deteriorating Bank Health: The Prompt Corrective Action Approach - with Sriniwas Mahapatro and Prasanna Tantri
Published in Contemporary Accounting Research

Abstract: Prior research shows that borrowers are more likely to default when their banks are financially distressed, particularly where contract enforcement is weak. We examine whether regulatory intervention in the form of Prompt Corrective Action (PCA), which seeks to improve bank health through enhanced monitoring, reverses such defaults. To address this question, we exploit the bright-line entry thresholds in India's PCA regime using a regression discontinuity framework. We first show that such defaults exist in India. Our main result is that PCA intervention significantly reduces such defaults. The result is robust to variation in methodology and alternative definitions of bank health. Our evidence suggests that PCA reduces such defaults by credibly signaling to borrowers the likely restoration of bank health and continuity of lending relationships. Its effectiveness was reinforced by an earlier regulatory reform that improved the timeliness of loan-loss provisioning, enhancing the credibility of enforcement. Overall, our findings suggest that PCA, when underpinned by credible financial reporting, can serve as an effective policy tool to curb strategic defaults. 

Creation After Destruction? Financial Intermediation and Firm Entry After Bank Cleanups - with Prasanna Tantri (Revise & Resubmit at Review of Finance)

Does Systemically Important Bank Status Affect Loan Performance? - with Shashwat Agarwal, Sriniwas Mahapatro, and Prasanna Tantri (Revise & Resubmit at Management Science)

Firm Market Power Channel of Transmission of Monetary Policy - with Prasanna Tantri (Revise & Resubmit at Journal of Money, Credit and Banking)

Financial Acceleration Through Banks - with Sriniwas Mahapatro and Prasanna Tantri

Do improvements in creditor rights dampen the financial acceleration of monetary policy shocks?

Do intermediaries help mitigate the contagious effects of runs? - with Raja Reddy Bujunoori, Prasanna Tantri, and Vikrant Vig

What Happens to Quantity Transmission When Monetary Policy Transmission Through Prices is Mandated? - with Ashirbad Mishra and Prasanna Tantri

Bank Cleanups and Shadow Bank Lending: Evidence from India - with Saikat Sovan Deb and Mike Mao