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

Anusha Chari, Lakshita Jain and Nirupama Kulkarni

No 15773, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 build-up of stressed assets in India’s predominantly state-owned banking system is consistent with accounting subterfuge.

Keywords: Regulatory forbearance; Non-performing assets; Stressed banks; Zombie lending (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
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Citations: View citations in EconPapers (13)

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