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Resolving Zombie Lending With Collateral Reform

Author

Listed:
  • Nirupama Kulkarni

    (Centre for Advanced Financial Research and Learning (CAFRAL))

Abstract

Zombie lending, defined as lending to otherwise insolvent borrowers, misallocates resources and hinders economic growth. This paper exploits a 2002 collateral reform in India as a natural experiment to show that improving the process of resolving bad loans can reduce the share of credit and capital allocated to zombie borrowers. Post-reform credit to distressed borrowers contracts due to a decline in continued lending to zombie borrowers, which subsequently cut investment. Credit to healthy firms increases that then expand investment. Allocative efficiency improves by 18.7%, with 94% of the improvement attributable to credit reallocation by lenders from zombie to non-zombie borrowers.

Suggested Citation

  • Nirupama Kulkarni, 2021. "Resolving Zombie Lending With Collateral Reform," Working Papers 022291, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022291
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/327202152843PMMisallocation_Creditor_Rights_II.pdf
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    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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