The Unholy Trinity: Regulatory Forbearance, Stressed Banks and Zombie Firms

84 Pages Posted: 12 Feb 2021

See all articles by Anusha Chari

Anusha Chari

University of North Carolina (UNC) at Chapel Hill - Department of Economics; National Bureau of Economic Research (NBER); University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Lakshita Jain

University of North Carolina (UNC) at Chapel Hill

Nirupama Kulkarni

CAFRAL; Government of India - Reserve Bank of India

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2021

Abstract

During the global financial crisis, the Reserve Bank of India enacted forbearance measures that lowered capital provisioning rates for loans under temporary liquidity stress. Matched bank-firm data reveal that troubled banks took advantage of the policy to also shield firms facing serious solvency issues. Perversely, in industries and bank portfolios with high proportions of failing firms, credit to healthy firms declined and was reallocated to the weakest firms. By incentivizing banks to hide true asset quality, the forbearance policy provided a license for regulatory arbitrage. The buildup of stressed assets in India’s predominantly state-owned banking system is consistent with accounting subterfuge.

JEL Classification: E58, G21, G28

Suggested Citation

Chari, Anusha and Jain, Lakshita and Kulkarni, Nirupama, The Unholy Trinity: Regulatory Forbearance, Stressed Banks and Zombie Firms (February 1, 2021). CEPR Discussion Paper No. DP15773, Available at SSRN: https://ssrn.com/abstract=3783999

Anusha Chari (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

McColl Building
Chapel Hill, NC 27599-3490
United States

Lakshita Jain

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Nirupama Kulkarni

CAFRAL ( email )

India

Government of India - Reserve Bank of India ( email )

Reserve Bank of India Main Building,
Mumbai, Maharashtra 400 001
India

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