Working Paper: NBER ID: w28435
Authors: Anusha Chari; Lakshita Jain; Nirupama Kulkarni
Abstract: During the global financial crisis, the Reserve Bank of India enacted forbearance measures that lowered capital provisioning rates for loans under temporary liquidity stress. Matched bank-firm data reveal that troubled banks took advantage of the policy to also shield firms facing serious solvency issues. Perversely, in industries and bank portfolios with high proportions of failing firms, credit to healthy firms declined and was 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 of stressed assets in India’s predominantly state-owned banking system is consistent with accounting subterfuge.
Keywords: regulatory forbearance; zombie firms; credit misallocation; banking sector; India
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) | lending to zombie firms (G21) |
| lending to zombie firms (G21) | crowded out lending to healthy firms (E44) |
| forbearance measures (G33) | misallocation of credit (E51) |
| lending to zombie firms (G21) | extend and pretend phenomenon (E71) |
| forbearance policy (G28) | twin balance sheet problem (F32) |
| state-owned banks (G21) | majority of zombie lending (G21) |