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Identifying Zombie Banks
A measure of zombieness for state-owned Indian banks is computed. Using data for 2011–20, the evidence shows that these banks account for 16% of state-owned banks’ equity, 23% of non-performing loans and 18% of their lending portfolio within the country. Multivariate regressions highlight the differential lending behaviour of zombies, after accounting for bank-specific controls and year effects.
The views expressed and the approach pursued in the article are strictly personal.
Much has been written about zombie firms and the challenges they pose for the financial system. By silently chipping away at the financial (banking) sector’s resources, they provide a false sense of security by adopting ingenious ways to hide the true extent of weaknesses, either on the asset or on the liability side of their balance sheets (or both). Acharya et al (2022) provide a comprehensive assessment of such firms and offer additional and more sophisticated ways to categorise them as zombies. In a recent article, Pattanaik et al (2022) provide an assessment of zombie firms in the Indian context. Their findings reveal that these firms account for 10% of non-financial corporate debt, are heavily levered and highly sensitive to monetary policy shocks.
Contextually, Rajan (2018) also employed the term “zombie” in his analysis of the evolution of bank’s bad loans in India, using it to refer to projects that are neither dead nor alive, thereby evincing limited promoter or bank interests. A growing proportion of zombie firms in an economy can congest the credit channel by diverting productive (bank) resources towards these entities, lowering the lendable resources for healthy firms.
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