Impact of creditor reforms on bank lending

Abstract

In developing countries like India, where credit markets are at a nascent stage and hence have a lot of informational asymmetries, Bank Lending becomes a very important source of credit for firms. However, the credit disbursement and recovery processes are filled with a lot of deficiencies. In the credit disbursement stage, we have been witnessing the phenomenon of zombie lending where creditors continue to lend credit to distressed borrowers at subsidized rates for reasons such as delaying reporting of losses, higher provisioning requirements of banks for NPAs, gambling for revival due to limited liability of lenders etc. This has been noted to have a significant impact on credit availability in the economy as evergreening of loans to unproductive firms/borrowers cuts off supply to the productive firms in the economy. The credit recovery process, on the other hand, has also been a major issue in India because of a legal system that favored debtors over creditors which led to a weak enforcement of creditor rights. This meant that the credit resolution process was a lengthy judicial procedure that costed creditors dearly and was not an economically favorable solution for creditors. Over the years, a number of credit reforms such as SARFAESI Act (2002), Insolvency and Bankruptcy Code (2016) have been put into action to address these deficiencies, which we intend to study in this report.