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Unearthing Zombies

Author

Listed:
  • Nirupama Kulkarni

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

  • S. K. Ritadhi

    (Ashoka University)

  • Siddharth Vij

    (University of Georgia)

  • Katherine Waldock

    (Columbia Law School)

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.

Suggested Citation

  • Nirupama Kulkarni & S. K. Ritadhi & Siddharth Vij & Katherine Waldock, 2021. "Unearthing Zombies," Working Papers 022292, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022292
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/327202153056PMIndia_IBC_Dec_2020.pdf
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    Keywords

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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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