bank entry and bankruptcy · todd gormley (wharton), nandini gupta (kelley), and anand jha (texas...

Bank Entry and Bankruptcy

Todd Gormley (Wharton), Nandini Gupta (Kelley), and Anand Jha(Texas A&M Intl.)

Emerging Markets Finance Conference, Tsinghua University, July 7-9,2010

Gormley, Gupta, Jha () Bank Entry and Bankruptcy July 8, 2010 1 / 37

Motivation

Bankruptcy procedures can be highly ine¢ cient - raising the cost ofborrowing and lowering the e¢ ciency of resource allocation.

Average duration in bankruptcy can exceed 4 years [World Bank,2010].

Nearly 50% of �rm value is lost on average [Djankov, et al. 2008].

Why are some systems so seemingly ine¢ cient?

Existing literature focuses on di¤erences in bankruptcy law [Seesurvey by Hotchkiss, John, Mooradian, and Thornburn, 2008].


E¢ ciency of bankruptcy process may depend on

Bankruptcy law and enforcement.

Use of bankruptcy related to creditor rights and judicial e¢ ciency[Claessens and Klapper, 2005]; recovery rates depend on legal system[Davydenko and Franks, 2008]; extended appeals lead to delays[Djankov et al., 2008].

Creditors�incentives to monitor borrowers and recover assets.

A major reason for bankruptcy delays in India is lack of response fromcreditors asked to make concessions in debt restructuring.


Our focus = Creditors

Research Question:Do the incentives of creditors a¤ect the bankruptcy process?

Competitiveness of the banking sector can a¤ect creditors�incentivesto monitor delinquent borrowers, recover assets quickly.

Private vs. government ownership of banks may a¤ect incentive topursue borrowers, desired bankruptcy outcomes.


Research design

Examine how a shift in the competitive and ownership structure ofbanks in a region a¤ects the incidence, outcomes, and duration ofcorporate bankruptcies in that region.

Exploit bank deregulation in India that led to the entry of domesticand foreign banks in sector dominated by government banks.

Also examine e¤ect of a change in creditor rights*.


India provides several advantages

Bank deregulation provides sharp break in banking sector competition.

Signi�cant variation in private domestic and foreign bank entry acrossregions and years.

Financial markets & bankruptcy process representative of otheremerging markets.

Bankruptcy law does not vary across regions and time, but bankingsector characteristics do.

Great data!


Preview of �ndings

Increase in banking sector competition in a district is associated with

Increase in bankruptcy �lings in that district.Decrease in the average duration of bankruptcy.More reorganizations and fewer liquidations.

Results driven by the entry of domestic private banks (notgovernment or foreign banks).

When creditor rights are strengthened...

Above associations are ampli�ed.Foreign banks now matter.


Bank deregulation led to signi�cant private bank entry

Pre-1991, system dominated by government banks.

Post-1991, system deregulated under argument that competitionwould improve e¢ ciency.

Private BanksShare of Total Deposits in 1991 4.42%Share of Total Deposits in 2004 18.08%

State and Nationalized BanksShare of Total Deposits in 1991 85.96%Share of Total Deposits in 2004 74.07%

Foreign BanksShare of Total Deposits in 1991 7.24%Share of Total Deposits in 2004 4.37%


nagupta

Rectangle

Why private bank entry matters - Chennai o¢ ces of India�slargest private bank

ICICI Bank in Chennai


And inside the Chennai o¢ ces of India�s largeststate-owned bank

Figure: State Bank of India, ChennaiGormley, Gupta, Jha () Bank Entry and Bankruptcy July 8, 2010 10 / 37

Bankruptcy law in India

Most companies �le under Sick Industrial Company Act (SICA) of1985.

Firms �le with the federal bankruptcy court based in New Delhi (theBIFR).All industrial �rms with > 50 workers & > 5 years of operations withlosses > net worth have to �le.

Automatic stay on assets once a �rm �les.

BIFR takes 1 year on average to determine if �rm is �sick�(trulyunable to pay debts).

Third of �lings dismissed because �rm is not sick.

If court �nds �rm to be sick then process continues. . .


Restructuring versus liquidation

By default, sick �rms enter into negotiations with lenders aboutreorganizing �rm & its debts

If no restructuring agreement reached BIFR may order liquidation.

Long delays before BIFR renders decision.

Liquidations subsequently take much longer to resolve thanreorganizations [10-20 years in civil courts, Panagariya, 2008].


Data

Banking dataData on branches, deposits, and loans in about 500 districts by bankownership group.Bank ownership groups include government, private domestic, foreignbanks.

Match banks to corporate bankruptcy data by district.Bankruptcy data

Hand-collected data on population of BIFR �lings from 1991-2004.Includes date of �ling, eventual outcome, date of exit, �nancial data,district location of �rm.


Empirical Speci�cation

District-level panel data regression

Bankruptcy Outcomedt= β0+β1Bank Environmentdt+X dt+δt+αd+εdt

District and year �xed e¤ects; Standard errors clustered at districtlevel.

Bank environment variables:

Bank competition: 1-HHI of Deposits is increasing in banking sectorcompetition, where HHI is based on bank ownership.Market share by bank ownership: State-owned bank % share ofdeposits; Private bank % share of deposits; Foreign bank % share ofdeposits

Xdt include district level time varying controls: Total Banks; TotalLoans; Firm Sales Growth; State-level GDP growth.


nagupta

Rectangle

Increase in bank competition is associated with increase incorporate bankruptcy �lings

Dependent Variable = Total Filings/Population

DismissedFilings

/PopulationSick Filings/Population

1 HH1 of Deposits 1.237*** 0.521*** 0.111(0.414) (0.179) (0.136)

Number of DistrictYears 7,187 7,187 7,187Number of Districts 565 565 565Rsquared 0.66 0.41 0.48


nagupta

Rectangle

Private bank entry appears important

Dependent Variable =

State Bank % of Deposits 0.016***(0.005)

Private Bank % of Deposits 0.041***(0.011)

Foreign Bank % of Deposits 0.131(0.120)

Number of DistrictYears 7,187 7,187 7,187Number of Districts 565 565 565Rsquared 0.66 0.67 0.66

Total Filings / Population


Despite increase in �lings...delays decrease


Private Bank % of Deposits 33.25** 48.04* 32.72*(16.23) (26.82) (18.00)

Foreign Bank % of Deposits 7.19 57.61*** 22.02(16.23) (21.45) (19.13)

Number of DistrictYears 488 488 136 136 422 422Number of Districts 184 184 69 69 165 165Rsquared 0.54 0.53 0.74 0.74 0.58 0.57

Average Duration ofWorkouts &Liquidations

Average Durationof Workouts

Average Durationof Liquidations


nagupta

Rectangle

Private bank entry is related to bankruptcy outcomes


Private Bank % of Deposits 0.007*** 0.006***(0.002) (0.002)

Foreign Bank % of Deposits 0.019 0.0070(0.020) (0.024)

Number of DistrictYears 7,187 7,187 7,187 7,187Number of Districts 565 565 565 565

Workouts/ Population

Liquidations/ Population


nagupta

Rectangle

Our interpretation

Private bank entry a¤ects creditor incentives to monitor loans andrecover assets faster.

Increased �lings may re�ect more aggressive lenders.Workouts may be quicker way to recover some value.Reduced duration (despite increased �lings) may re�ect willingness oflenders to accept concessions.

Foreign banks less able to navigate courts?


Do local creditor rights matter?

Use introduction of Debt Recovery Tribunals (DRT) as shock to�creditor rights�

Tribunals were set up to streamline procedures.Establishment of DRTs was staggered across states and time from1994-1999 because of legal �ghts.DRT doesn�t prevent �rm from seeking BIFR stay.

If �ndings re�ect creditor incentives, we might expect them to varybased on creditor rights.

Bank entry and bankruptcy �lings associations are stronger in regionswith stronger creditor rights. Foreign banks now matter.


Alternative explanations?

Results not driven by omitted variables such as bank entry into highgrowth districts or districts with more non-performing loans.

Does not appear driven by simultaneity bias: bank entry precedeschanges in bankruptcy outcomes.

Does not appear driven by shift in supply of credit or change inborrower characteristics.

Please see paper for details. . .


Concluding remarks

Role of creditors in bankruptcy process not previously considered byliterature.

Evidence suggests creditor incentives, captured by bank competition &ownership, may matter.Government ownership and lack of competition may contribute toine¢ ciency of bankruptcy systems.

Reforms that focus on changes in bankruptcy law need to take intoaccount local �nancial market characteristics.

Provides another explanation for why bankruptcy outcomes may varywithin a given legal framework.


Creditor rights in combination with bank entry appearimportant


DRT in State 0.0183 0.0003(0.033) (0.029)

Private Bank % of Deposits 0.034***(0.012)

DRT in State * Private Bank % of Deposits 0.008*(0.005)

Foreign Bank % of Deposits 0.091*(0.052)

DRT in State * Foreign Bank % of Deposits 0.207***(0.025)

Total Filings /Population


Identi�cation concerns

Three main issues of concern

Omitted variable bias possible if bank entry correlated totime-varying factors related to bankruptcy.

Simultaneity bias possible if bankruptcy outcomes a¤ect bank entrychoices.

Need to rule out alternative channels by which bank entry maya¤ect bankruptcy.


Identifying impact of bank entry #1

Possible bias #1: Bank entry is related to growth prospects, which isrelated to increased �rm exits?

But, �ndings seem robust to various controls. . .

State-level GDP growthDistrict-level growth in loans (Log total loans)Urban-year �xed e¤ects.State-year �xed e¤ects.Growth in aggregate �rm-level sales at the district level.

And, �growth�is inconsistent with no increase in distressed �rms.

Also, can�t explain duration or other results.


Controlling for State and District Growth


Private Bank % of Deposits 0.041*** 0.035*** 0.039***(0.011) (0.011) (0.013)

Log (State GDP) 0.120(0.135)

Log (Total Loans in District) 0.010(0.052)

Year fixed effects X X XDistrict fixed effects X X XUrbanyear fixed effects XStateyear fixed effects XNumber of DistrictYears 7,187 7,187 7,187Number of Districts 565 565 565



Identifying impact of bank entry #2

Possible bias #2: Bank entry is greater where incumbent banks areburdened with political NPLs?

But, size of private bank entry is unrelated to share of governmentdeposits prior to their entry.

And, �ndings are robust to proxies for �political loans�.

Also can�t explain other results


Controlling for political loans


Private Bank % of Deposits 0.075*** 0.075*** 0.075***(0.018) (0.018) (0.018)

% of Borrowings by Gov't Firms 0.174(0.176)

% of Sales by Gov't Firms 0.0533(0.187)

Log (Firm Sales in District) 0.015(0.017)

Number of DistrictYears 2,470 2,506 2,549Number of Districts 238 241 242



Identifying direction of relationship

Simultaneity bias: Bankruptcies weaken incumbent banks and facilitateentry of new, private banks?

Why would a shift to workouts, or reduced duration be subject tosuch a bias?

Adding leads & lags, we �nd bankruptcy �lings are related to laggedbank entry.


Bankruptcy �lings related to lagged bank entry

Dependent Variable =Private Bank % of Deposits [t+1] 0.012 0.010 0.012

(0.009) (0.009) (0.009)Private Bank % of Deposits [t] 0.037*** 0.006 0.003

(0.010) (0.009) (0.009)Private Bank % of Deposits[t1] 0.045*** 0.027**

(0.016) (0.012)Private Bank % of Deposits [t2] 0.033***

(0.009)Number of DistrictYears 6,643 6,088 5,533Number of Districts 565 565 558Rsquared 0.67 0.68 0.70



Alternative channels #1

Supply of credit changing?

Easier access might reduce bankruptcies; don�t �nd that.

More product market competition might increase number of sick�rms; don�t �nd that.

Worse access for �opaque��rms or riskier, or less pro�table �rmsmight increase number of sick �rms; don�t �nd that.

Also unclear why related to other �ndings. . . and, we�ve tried tocontrol for this in number of ways.


Alternative channels #2

Private and foreign banks lend to di¤erent �rms (where bankruptcy moreeasily resolved)?

No evidence of change in net worth, accumulated losses, or average #of workers in �rms �ling for bankruptcy.

If �rms are di¤erent, why no change in # of �sick��rms?

Also can�t explain �dismissed�or �creditor rights��ndings.


Bank entry does not a¤ect characteristics of bankrupt �rms

(1) (2) (3) (4) (5) (6) (7) (8) (9)Total Banks / Population 0.0212 0.0176 0.0246 0.0498 0.0471 0.0566 0.0507 0.0537 0.053

(0.028) (0.030) (0.028) (0.035) (0.038) (0.036) (0.035) (0.039) (0.036)State Bank % of Deposits 0.525 1.291 0.132 0.151 0.1447

(1.432) (1.374) (0.504) (0.497) (0.509)Private Bank % of Deposits 0.766 1.112 0.672

(1.616) (1.541) (1.042)Foreign Bank % of Deposits 1.398 0.782 1.651

(3.361) (2.341) (1.634)Number of DistrictYears 1031 1031 1031 1029 1029 1029 1018 1018 1018Number of Districts 252 252 252 251 251 251 251 251 251

Panel A

Average Net Worth Average Accumulated Losses Average Number of Workers


Controlling for bankrupt �rms�characteristics

Total Filings/Population

DismissedFilings

/PopulationSick Filings/Population

Workouts/Population

Liquidations/Population

AverageDuration

Private Bank % of Deposits 0.940 0.4004 0.189 0.1982 0.0088 3063.577(0.2601)** (0.1770)* (0.0888)* (0.0508)** (0.057) (1,529.7731)*

Average Accumulated Losses 0.002 0.004 0.006 0.0021 0.004 43.688(0.005) (0.003) (0.0028)* (0.002) (0.0019)* (93.975)

Average Net Worth 0.008 0.000 0.008 0.005 0.003 74.735(0.0038)* (0.002) (0.0025)** (0.0021)* (0.002) (88.111)

Average Number of Workers 0.009 0.002 0.000 0.001 0.001 146.280(0.0040)* (0.002) (0.002) (0.002) (0.002) (59.1660)*

Number of DistrictYears 1,016 1,016 1,016 1,016 1,016 537Number of Districts (250) (250) (250) (250) (250) (194)

Panel B


Implications

Di¤erences in bankruptcy law across countries matter.

Use of bankruptcy related to creditor rights and judicial e¢ ciency(Claessens and Klapper, 2005).Recovery rates vary based on di¤erences in law (Davydenko andFranks, 2008).

It isn�t just bankruptcy law that matters.

Provide an explanation as to why outcomes may also vary within alegal framework.

Di¤use lending relationships can a¤ect use of bankruptcy (Gilson,John, and Lang, 1990).Biases of bankruptcy judges can a¤ect outcomes (Chang and Schoar,2007).


Suggests another impact of bank entry

An increase in banking sector competitiveness can

Increase �nancing constraints (Petersen and Rajan, 1995), or increaseaccess to credit (Guiso, Sapienza, and Zingales, 2007), reduce badloans and increase economic growth (Jayaratne and Strahan, 1996,Cetorelli and Gambera, 2001).Deregulation can increase product market competition and reducesubsidies to bad �rms (Bertrand, Schoar, and Thesmar, 2007).

More government ownership of banks is associated with

Less developed �nancial markets and lower economic growth (La Porta,Lopez-de-Silanes, and Shleifer, 2002), �nancing constraints (Beck,Demirguc-Kunt, and Maksimovic, 2004).More politically motivated lending (Sapienza, 2004).

Our study suggests that banking sector entry and ownership can alsoa¤ect the ex-post monitoring of borrowers.


bank entry and bankruptcy · todd gormley (wharton), nandini gupta (kelley), and anand jha (texas...

Documents