Unearthing Zombies

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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. Although there was widespread non-disclosure of zombies in India in 2014, the beginning of the sample period, there have been major improvements since. We examine changes in zombie reporting around two key policy changes: an overhaul of the bankruptcy code and a regulatory intervention removing lender discretion in bad loan recognition. Increases in reporting were modest after the bankruptcy reform but there was a sizable jump in the recognition of zombies after the regulatory intervention. Post-intervention results show that lending has been reallocated to large, healthy borrowers. However, under-reporting still exists, particularly among public-sector banks. Overall, our results indicate that regulatory action might be necessary, above and beyond bankruptcy reform, to target "zombie" lending.

Keywords: F34, G23, G28, G33, K42, O53

JEL Classification: NPA, Zombie, Bankruptcy, Bank Regulation, India, Creative Destruction

Suggested Citation

Kulkarni, Nirupama and Ritadhi, S.K. and Vij, Siddharth and Waldock, Katherine, Unearthing Zombies (November 29, 2019). Available at SSRN: https://ssrn.com/abstract=

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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