Working Paper: CEPR ID: DP15773
Authors: Anusha Chari; Lakshita Jain; Nirupama Kulkarni
Abstract: During the global financial crisis, the Reserve Bank of India enacted forbearance measuresthat lowered capital provisioning rates for loans under temporary liquidity stress.Matched bank-firm data reveal that troubled banks took advantage of the policy toalso shield firms facing serious solvency issues. Perversely, in industries and bank portfolioswith high proportions of failing firms, credit to healthy firms declined andwas 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 ofstressed assets in India’s predominantly state-owned banking system is consistent withaccounting subterfuge.
Keywords: regulatory forbearance; nonperforming assets; stressed banks; zombie lending
JEL Codes: E58; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory forbearance (G28) | Increased lending to zombie firms (G21) |
| Increased lending to zombie firms (G21) | Misallocation of credit (E51) |
| Regulatory forbearance (G28) | Misallocation of credit (E51) |
| Withdrawal of forbearance (G28) | No significant change in lending patterns (G21) |
| Stressed banks (G21) | Continued lending to low-solvency firms post-withdrawal (G33) |
| Forbearance policy (G28) | Evergreening of loans to zombie firms (G32) |
| Regulatory forbearance (G28) | Decline in lending to healthy firms (G21) |