Resolving Zombie Lending With Collateral Reform

Nirupama Kulkarni

Working Papers from 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.

Keywords: Misallocation; Credit Access; Financial distress; Creditor rights; Collateral; Zombie firms (search for similar items in EconPapers)
JEL-codes: G33 G34 K22 O16 O47 (search for similar items in EconPapers)
Pages: 85
Date: 2021-03
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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022291

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