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Unearthing Zombies

Author

Listed:
  • Nirupama Kulkarni

    (` CAFRAL)

  • S.K. Ritadhi

    (` Department of Economics, Ashoka University)

  • Sayan Mukherjee

    (` Indian Statistical Institute, Kolkata)

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 & Sayan Mukherjee, 2021. "Unearthing Zombies," Working Papers 59, Ashoka University, Department of Economics.
    • Handle: RePEc:ash:wpaper:59
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    File URL: https://dp.ashoka.edu.in/ash/wpaper/paper59_0.pdf
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