How Does The Rescue of Weak Banks Through Mergers Impact Loan Performance? Evidence From India

We study the impact of a government-mediated takeover of weak small banks by stronger large banks in India during the recent banking crisis on loan performance. Our within borrower-time and between banks tests show a 25% reduction in delinquency. Evidence on mechanisms suggests that borrowers strategically default on weak banks anticipating denial of credit in the future, and such defaults reverse after the merger. The borrowers of weak merged banks receive a higher level of credit from the merged entity; hence, their incentive to default reduces. Consequently, we find an increase in investments in regions dominated by merged weak banks.