Forbearance Lending as a Crisis Management Tool: Evidence from Japan

Credit market interventions have become a widespread policy tool deployed by governments around the world to support their corporate sectors following shocks like the GFC and the pandemic. Among those policies, forbearance programs allowed firms to temporarily stop making payments on their debt obligations or obtain debt forgiveness; However, the impact of these policies is not fully understood. In particular, forbearance is generally believed to keep unviable firms alive and to contribute to the zombification of the corporate sector. To inform this debate, we examine the effects of Japan’s SME Financing Facilitation Act, which encouraged banks to offer forbearance to troubled SMEs. We develop a framework to quantify the aggregate impact of the policy using a difference-in-differences approach combined with back-of-the-envelope counterfactual exercises. Our evaluation indicates that, when coupled with business restructuring plans, forbearance lending can temporarily boost output without contributing to the widespread zombification of the corporate sector. Forbearance is more effective when credit market disruptions impede the reallocation of capital.