Page 249 - ES 2020-21_Volume-1-2 [28-01-21]

232 Economic Survey 2020-21 Volume 1

Capital Adequacy Ratio X
Zombie -0.0039 -0.0036
(-0.7303) (-0.6736)
Exposure to AQR (%) X
Capital Adequacy Ratio X
Zombie -0.2752*** -0.2682***
(-3.0560) (-3.0201)

Observations 117,827 117,827 83,977 83,977
R-squared 0.3202 0.3265 0.3506 0.3567
Controls No Yes No Yes
FE Firm X Year & Lender
Clustering Lender

Table 9: This table reports the OLS estimates of the impact of AQR on lending. Standard
errors are clustered at the lender level and t-statistics are reported in parentheses. *p<0.1;
**p<.05; ***p<0.01. Source: Chopra, Subramanian, and Tantri (2020).

In all the columns of Table 9, we see that the AQR led to a decline in lending as seen in
the consistently negative coefficient of the variable Exposure to AQR. In the first two
columns, the positive coefficient for the interaction term suggests that while overall
lending declined, lending to the zombie firms increased after the AQR; thus, the zombie
firms were less impacted by the credit contraction following the AQR.
In columns (3) and (4), the positive coefficient estimate for the interaction between
Exposure and Capital Adequacy Ratio suggests that lower capital exacerbated the impact
of Exposure to AQR on lending. To see this, note that the marginal impact of Exposure
to AQR, which is given by the partial derivative ∂(lending)/∂(Exposure to AQR),
equals -4.8 + 3.9* Zombie + 0.38* Capital Adequacy Ratio – 0.27* (Zombie*Capital
Adequacy Ratio). As the sign of the coefficient for capital adequacy ratio is positive,
this implies that the marginal impact of the AQR on lending was disproportionately
greater for banks with a lower capital adequacy ratio. Also, the sign of the interaction
term Zombie*Capital Adequacy Ratio in this marginal impact is negative, which implies
that the lending declined less for the zombie firms that engaged with undercapitalized
banks.

Decline in Firm’s Capital Investment
7.40 Banks’ tightening of credit supply negatively impacts healthy borrowers as it forces firms
to cut down on their investments and capital expenditures. Thus, the likelihood of stalling
of ongoing projects increases. Figure 28 plots the value of stalled projects for firms. There
is a significant increase in the value of stalled projects following the AQR for firms exposed
to banks affected by the AQR when compared to firms that engaged with unaffected banks.
Chopra, Subramanian, and Tantri (2020) find that the firms more exposed to the AQR- affected
banks could not entirely replace their credit supply from other financial institutions. Thus, these
firms became financially constrained and reduced their capital expenditures, leading to ongoing
projects being stalled.