Contagious Effects of a Political Intervention in Debt Contracts: Evidence Using Loan-Level Data

By Prasanna Tantri
The Review of Financial Studies | November 2018

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Tantri, Prasanna. Contagious Effects of a Political Intervention in Debt Contracts: Evidence Using Loan-Level Data The Review of Financial Studies academic.oup.com/rfs/article-abstract/31/11/4556/4819200?redirectedFrom=fulltext.

The Review of Financial Studies, 2018

Abstract

Using an unexpected government regulation that restricted the ability of microfinance institutions to recover loans in one Indian state, I examine whether this intervention affected bank loan performance. The bank loan delinquency rate significantly increased as a result. In response, the ex post bank credit supply declined by more than half. For identification, I compare loans from branches located in regions subject to this intervention with loans from nearby branches of the same bank located in regions not subject to the intervention. I conclude that political interventions in credit markets could have significant spillover effects.

Prasanna Tantri is an Associate Professor of Finance and the Executive Director of the Centre for Analytical Finance at the Indian School of Business (ISB). He also serves as an Independent Director and Chair of the Audit Committee at Power Finance Corporation. In 2o24, he was appointed as a Member of the Technical Advisory Committee for the Evaluation of Schemes for the Promotion of Digital Payments in India, under the Development Monitoring & Evaluation Office (DMEO), NITI Aayog.

Professor Tantri has previously been a part of the Expert Working Group at the National Stock Exchange and a Member of the Technical Group on the Social Stock Exchange, constituted by the Securities and Exchange Board of India. His research interests include banking, financial inclusion, financial contagion, regulation, and the relationship between politics and finance.

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