Unearthing Zombies

Nirupama Kulkarni (), S. K. Ritadhi (), Siddharth Vij () and Katherine Waldock ()
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Nirupama Kulkarni: Centre For Advanced Financial Research And Learning, Reserve Bank of India, Mumbai, Maharashtra 400051, India
S. K. Ritadhi: Occidental College, Los Angeles, California 90041; and Ashoka University, Sonepat, Haryana 131029, India
Siddharth Vij: Terry College of Business, University of Georgia, Athens, Georgia 30605
Katherine Waldock: Wachtell, Lipton, Rosen & Katz, New York, New York 10019

Management Science, 2025, vol. 71, issue 9, 7840-7862

Abstract: Bankruptcy reforms that improve lenders’ ability to recover claims from financially distressed borrowers can mitigate zombie lending. However, we show that after a 2016 bankruptcy reform in India, lenders are reluctant to recognize zombie credit as nonperforming, impeding reform efficacy. A subsequent complementary regulation targeting lender discretion in recognizing nonperforming assets improves zombie recognition fivefold. The lender disincentive to recognize zombies arises from undercapitalized banks’ reluctance to realize loan losses and political economy frictions at state-owned banks. Resolving zombie credit allows lenders to redirect credit to healthy borrowers, but effects are muted at banks more exposed to zombie borrowers.

Keywords: zombie; bankruptcy; banking regulation; India; creative destruction (search for similar items in EconPapers)
Date: 2025
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