Unearthing Zombies

55 Pages Posted: 16 Dec 2019 Last revised: 12 Oct 2020

See all articles by Nirupama Kulkarni

Nirupama Kulkarni

University of California, Berkeley - Haas School of Business

S.K. Ritadhi

Ashoka University; 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

"Zombie" borrowers - insolvent firms sustained by continued extension of credit by complicit banks - can prevent the efficient allocation of resources. We use supervisory data on the universe of large bank-borrower relationships in India to examine two key reforms aimed at tackling zombie lending: an overhaul of the bankruptcy law, and a subsequent regulation that removed lender discretion in recognizing bad loans. Using a novel method to identify zombies, we show that the latter reform is more effective in forcing banks to recognize zombie loans as non-performing. While the effect of the bankruptcy law is muted in weakly capitalized and government-owned banks, the regulatory action is able to nullify the influence of capital but not ownership. Post-intervention credit reallocates to young and healthy borrowers. Zombie borrowers then cut investment, whereas healthy borrowers expand it. Overall, our results suggest that regulatory action might be necessary, above and beyond bankruptcy reform, to target zombie lending in weakly capitalized banking systems, but governance frictions can limit the efficacy of even the strongest regulation.

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

Ashoka University ( email )

Plot #2,
Rajiv Gandhi Education City
Kundli, 131028
India

HOME PAGE: http://https://www.ashoka.edu.in/welcome/faculty#!/sk-ritadhi-1691

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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