Unearthing Zombies

62 Pages Posted: 16 Dec 2019 Last revised: 21 Mar 2021

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; Ashoka University

Siddharth Vij

University of Georgia Terry College of Business

Katherine Waldock

Georgetown University McDonough School of Business

Date Written: November 29, 2019

Abstract

Since ineffective debt resolution perpetuates zombie lending, bankruptcy reform has emerged as a solution. We show, however, that lender-based frictions can limit reform impact. Exploiting a unique empirical setting and novel supervisory data from India, we document that a new bankruptcy law had muted effects on lenders recognizing zombie borrowers as non-performing. A subsequent unexpected regulation, targeting perverse lender incentives to continue concealing zombies, increased zombie recognition particularly for undercapitalized and government-owned banks, highlighting the role of bank capital and political frictions in sustaining zombie lending. Resolving zombie loans allowed lenders to reallocate credit to healthier borrowers who increased investment.

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 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

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

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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