Page 229 - ES 2020-21_Volume-1-2 [28-01-21]

212 Economic Survey 2020-21 Volume 1

Figure 12: Dividend Payout by Banks

Source: CMIE Prowess
Higher (Lower) Restructuring Bank: Average dividend payout by banks with above-median (below-median) share
of restructured loans

7.14 Further, banks with a high share of restructured loans raised less fresh capital than banks
with a low share of restructured loans. The former raised only 1.67% of their average assets
as fresh capital during the forbearance period compared to 2.04% by the latter. More dividend
payments and less capital infusion exacerbated the undercapitalization of banks with higher
restructuring. The combined effect of higher dividends and lower fresh capital led to a stark
difference in the Capital Adequacy Ratio (CAR) between the two types of banks. CAR was
lower by close to 2.5 percentage points for banks with a higher share of restructured loans when
compared to banks with fewer restructured assets in 2014-15. Thus, forbearance left several
banks undercapitalized.

Lending to Zombie Firms
7.15 As noted above, reduction in the capital is akin to reduced “skin in the game.” It distorts
the incentives of the bank owners and incumbent management. With less of their own money at
stake, banks become increasingly risk-seeking (Diamond and Rajan, 2011). As explained in Box
1, undercapitalized banks find risky lending and shady lending practices, such as those based on
high upfront fees, attractive.
7.16 Chari, Jain, and Kulkarni (2019) document that regulatory forbearance led to an increase
in lending to low-solvency and low-liquidity firms. Precisely, the forbearance period witnessed
an increase in lending to unproductive firms, popularly referred to as “zombies”. Zombies are
typically identified using the interest coverage ratio, the ratio of a firm’s profit after tax to its total