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The economic effects of a borrower bailout : evidence from an emerging market

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  • Gine, Xavier
  • Kanz, Martin

Abstract

This paper studies the credit market implications and real effects of one the largest borrower bailout programs in history, enacted by the government of India against the backdrop of the 2008-2009 financial crisis. The study finds that the stimulus program had no effect on productivity, wages, or consumption, but led to significant changes in credit allocation and an increase in defaults. Post-program loan performance declines faster in districts with greater exposure to the program, an effect that is not driven by greater risk-taking of banks. Loan defaults become significantly more sensitive to the electoral cycle after the program, suggesting the anticipation of future credit market interventions as an important channel through which moral hazard in loan repayment is intensified.

Suggested Citation

  • Gine, Xavier & Kanz, Martin, 2014. "The economic effects of a borrower bailout : evidence from an emerging market," Policy Research Working Paper Series 7109, The World Bank.
    • Handle: RePEc:wbk:wbrwps:7109
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    2. Aidt, Toke & Asatryan, Zareh & Badalyan, Lusine, 2024. "Political consequences of (consumer) debt relief," ZEW Discussion Papers 24-030, ZEW - Leibniz Centre for European Economic Research.
    3. Saibal Ghosh, 2023. "Political connections and bank behaviour," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(1), February.
    4. Kumar, Nitish, 2020. "Political interference and crowding out in bank lending," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    5. Ma, Chang & Nguyen, Xuan-Hai, 2021. "Too big to fail and optimal regulation," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 747-758.
    6. Ajay Shah, 2023. "The journey of Indian finance," Working Papers 25, xKDR.
    7. Liu, Zihua & Zhou, Sili, 2022. "Political favoritism towards resource allocation: Evidence of grants by natural science foundation in China," Emerging Markets Review, Elsevier, vol. 51(PA).
    8. World Bank, "undated". "South Asia Economic Focus, Spring 2020," World Bank Publications - Reports 33478, The World Bank Group.
    9. André Albuquerque Sant’Anna & Lucas Costa, 2019. "Bailing out environmental liabilities: moral hazard and deforestation in the Brazilian Amazon," Documentos de Trabajo 17435, The Latin American and Caribbean Economic Association (LACEA).
    10. Gao, Haoyu & Ouyang, Yiling & Wang, Yaxin, 2024. "Corporate bond defaults and spillover effects on bank risk: Evidence from city commercial banks in China," Research in International Business and Finance, Elsevier, vol. 69(C).

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