Unearthing Zombies

76 Pages Posted: 16 Dec 2019 Last revised: 2 Apr 2020

See all articles by Nirupama Kulkarni

Nirupama Kulkarni

University of California, Berkeley - Haas School of Business

S.K. Ritadhi

University of California, Berkeley - Department of Agricultural & Resource Economics

Siddharth Vij

University of Georgia Terry College of Business

Katherine Waldock

Georgetown University McDonough School of Business

Date Written: November 29, 2019

Abstract

The secular rise of "zombie" borrowers, insolvent firms sustained by continued extension of credit by complicit banks, has been a source of concern for mature and emerging economies alike. Using supervisory data on the universe of large bank-borrower relationships in India, we introduce a novel method for identifying zombies. We use this classification to test the effect on zombie recognition of two key reforms: an overhaul of the bankruptcy law and a regulatory intervention removing lender discretion in bad loan recognition. Increases in the recognition of zombie accounts as non-performing were modest after the law change but there was a more sizable increase post the regulatory action. We show that the effect of the bankruptcy law was wholly concentrated among well-capitalized private banks; the regulatory action was required for undercapitalized and public-sector banks to respond. Post-intervention results indicate that lending has been reallocated to large, healthy borrowers. Overall, our results suggest that regulatory action might be necessary, above and beyond bankruptcy reform, to target "zombie" lending in the presence of weak banks and cronyism.

Keywords: NPA, Zombie, Bankruptcy, Bank Regulation, India, Creative Destruction

JEL Classification: F34, G23, G28, G33, K42, O53

Suggested Citation

Kulkarni, Nirupama and Ritadhi, S.K. and Vij, Siddharth and Waldock, Katherine, Unearthing Zombies (November 29, 2019). Georgetown McDonough School of Business Research Paper No. 3495660. Available at SSRN: https://ssrn.com/abstract=3495660 or http://dx.doi.org/10.2139/ssrn.3495660

Nirupama Kulkarni

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

S.K. Ritadhi

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

Siddharth Vij (Contact Author)

University of Georgia Terry College of Business ( email )

620 S. Lumpkin Street
Amos Hall, B324
Athens, GA 30602
United States

Katherine Waldock

Georgetown University McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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