The Economic Effects of a Borrower Bailout : Evidence from an Emerging Market

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.