Page 247 - ES 2020-21_Volume-1-2 [28-01-21]

230 Economic Survey 2020-21 Volume 1

AQR. Figure 27, which plots the share of lending to zombie firms against the difference in bank’s
NPA, suggests that the affected banks, however, increased their exposure to risky borrowers.
The economic rationale behind the relationship between reduction in capital and increased risky
lending has already been explained in Box 1. Thus, in an already stressed banking sector, the
second wave of under-capitalization caused by the AQR created perverse incentives to lend even
more to the unproductive zombie borrowers. Box 9 shows this evidence using panel regressions
that control for various confounding factors.

Figure 26: AQR’s Impact on Bank Lending

Source: CMIE Prowess and Ministry of Corporate Affairs

Box 9: Impact of the AQR on overall lending and zombie lending
through undercapitalization

The decline in overall lending:
Chopra, Subramanian, and Tantri (2020) use the below panel regression to document the
impact of the AQR on overall lending by the banking sector:
Log(Loan Amount ) = α + β × Exposure to AQR + β × X + ν + δ + ϵ ijt
it
ijt
1
jt
i
2
ijt
The key dependent variable is the natural logarithm of the total amount lent by a bank i to
a firm j in the financial year t. The observations are at the firm-lender-year level. Exposure
is defined as the lender’s divergence in provisions due to the AQR (as a % of total assets).
controls for any time-varying firm-level trend, i.e. any variation in firm-level demand for
credit. captures time-invariant lender level effects. are variables controlling for time-varying
firm-lender-year level trends. The results are provided below: