Natural Disasters, Interest Rates Dynamics, and Economic Activities

We present novel evidence regarding the impact of natural disasters on the dynamics of interest rates and their influence on real economic activities. Using the universe of bank loans in India, we find that local branches exposed to natural disasters increase loan interest rates for all kinds of borrowers. We also observe a decline in credits. Importantly, these effects persist for at least three years. These results are critical because the local branches are the ones with the soft information. We link rising interest rates to increased default risks of the borrowers and find multiple patterns that corroborate this assertion. Firms respond to natural disasters by increasing their interest expenses and decreasing bank debts. These effects also endure for a number of years. Additionally, cross-sectional spike in interest rates results in a decline in nightlight based real economic activity as well as firm level R&D expenditures. It suggests a novel financial intermediation channel through which natural disaster shocks transmit to the real economy