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Unearthing Zombies

Nirupama Kulkarni (), S.K. Ritadhi () and Sayan Mukherjee ()
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Nirupama Kulkarni: ` CAFRAL
S.K. Ritadhi: ` Department of Economics, Ashoka University
Sayan Mukherjee: ` Indian Statistical Institute, Kolkata

No 59, Working Papers from Ashoka University, Department of Economics

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.

Keywords: Banking; Regulation; Bankruptcy; Creative; Destruction; India; Zombie (search for similar items in EconPapers)
Pages: 63
Date: 2021-05-05
New Economics Papers: this item is included in nep-ban and nep-fdg
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