Page 231 - ES 2020-21_Volume-1-2 [28-01-21]

214 Economic Survey 2020-21 Volume 1

difference reached a peak of over 6% in FY2013. Therefore, banks possibly used the above
indirect mechanism of lending to firms related to zombie firms with the hope of their existing
loans getting repaid. Evidence for the same is provided in Box 4.
Figure 14: Share of New Loans to Zombie Firms

Source: MCA Index of charges
Individual Firm: Percentage share of new loans to zombie firms (interest coverage less than one)Business Group:
Percentage share of new loans to firms belonging to zombie business groups (business groups whose combined
interest coverage is less than one)
Box 4:- Zombie lending – The case of a prominent wilful defaulter

The illustration below demonstrates how a financially troubled firm in a business group
continued receiving loans through other group firms during the forbearance regime. The
business group had many firms, of which 4 major firms received the bulk of loans during the
period 2008-09 to 2014-15, as shown below. Firm A was the most troubled firm within the
group, to whom banks ceased lending from FY2013 onwards. Yet, the same banks increased
lending to firm C which could have diverted the extra credit to firm A. The group as a whole
had a combined interest coverage of -0.04 between FY2013 to FY2015. Firm C, which had
an interest coverage of 4.41 received loans worth INR 2,244 Cr during FY2013 to FY2015.
Although the loans appeared healthy in banks’ loan books, they were given to a business
group under distress. This demonstrates that banks engage in proxy zombie lending by
lending to healthy borrowers of a distressed group, who could ultimately divert the loans to
other distressed firms within the group.

Loan Amount (in Cr) Interest coverage
Firm Name
2009-2012 2013-2015 2009-2012 2013-2015
PSBs Private PSBs Private

Firm A 3430 267 0 0 -1.34 -1.37
Firm B 637 835 52 12 8.51 -0.32
Firm C 0 66 1652 592 3.85 4.41
Firm D (sold in
2013) 2381 819 150 2506 3.43 -0.57

Box 5:- Lending to the “Dirty Dozen”