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SURBHI BHATIA : Residents near the international border in Jammu and Kashmir have faced incidents of mortar shelling for years. A new study has found a link between such events and banks’ approach to lending in affected areas. Interest rates tend to go up after an episode of shelling, even as the amounts lent by banks remain unchanged, the study finds.

The study, by Mrinal Mishra and Steven Ongena of Swiss Finance Institute, uses data on loans from Jammu and Kashmir’s largest bank between January 2011 and June 2017. The authors cover bank branches located within 10 km from the international border in Jammu, Samba and Kathua districts.

The study analyzes three major episodes of mortar shelling from 2014 to 2016, which led to temporary migration of residents. The data for this was taken from South Asian Terrorism Portal.

The authors find a cumulative jump of 20 basis points in loan interest rates in the aftermath of the three shelling incidents. The first two incidents saw interest rates in bank branches of affected areas go up by 5.5 basis points each, but after the third one, in October 2016, the rates rose even more: 9 basis points.

But the authors do not find any large change in loan amounts disbursed, which hints at a change both on the supply and the demand side of loans.

Loans deemed safer—those whose disbursal is not affected by shelling events—were found to be rising 11% in volume at bank branches in affected areas, the study finds. Over time, the lending pattern shows a 21.4% reallocation from risky to safe loans. The authors attribute this to bank officers being more risk-averse in sanctioning loans after a shelling incident.

Also read: The Effect of Conflict on Lending: Evidence from Indian Border Areas

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