Presented at (including upcoming): MFA Annual Meeting 2026, 6th RCF-ECGI Corporate Finance and Governance Conference 2025, Bank of Finland's Banking Workshop 2024, Indian Management Research Conference at IIM Ahmedabad 2024.
This paper find that politics worsens risk-shifting at government-led banks in India. Following a system-wide asset quality review that revealed state-owned banks to have large amounts of undisclosed bad loans, I find that higher government ownership led to larger ex-post capital injections. These taxpayer-funded bailouts came with political strings: credit was reallocated toward electorally strategic, but low-productivity, borrowers. Undercapitalized state-owned banks made new loans to zombie firms and risky politically connected firms, whereas private and better-capitalized banks improved loan quality. Comparing credit allocation at branches within the same state-owned bank, I find that branches in election constituencies increase zombie lending; the same banks' non-election branches do not. These patterns are absent at private banks or in off-election years. Politically driven credit crowds out politically unconnected private firms, which reduce investment by 7 percent, as an unintended consequence of supervision.