The past two decades have witnessed the better play of credit expansion and contraction, decorating the balance sheets of Indian banks with delinquent amount of loans. Worthy to note, some banks have taken the high road of credit extension continuation and it wouldn’t be surprising to see borrowers “alive” on paper despite the waning economic productivity. Such firms who skip selling or writing off these credits acclaim the term “zombies” – practically so because they restrict and tie productive capital and workforce while preying upon newer and healthy investments.
Not to deny, it’s hideous to effectively distinguish between zombies, distressed businesses and businesses with subsidised loans, until RBI lays down clear demarcations as Central Repository of Information on Large Credits (CRILC). If you come across a firm that record positive credit upgrowth even after 90 days past due on credit in preceding quarter, that’s a zombie! Zombies usually register credit ratings lower than AA and fail to establish fresh banking relations over eight quarters. Conclusively, such threatening firms take up 11% of total borrowers and about a third of them lag heavily on generating sufficient cash flow to write off their annual interests. Thus, their loan balances just keep increasing.
India has transacted itself from socialism economy style with limited entry to capitalistic system without exit, and that is the creation of a zombie land – a bunch of firms, neither alive nor dead. Obviously, a global pandemic has hurt the issue even more. It has fundamentally bruised lacks of companies which only had a safe shot in the form of loan guarantees, moratoriums and debt evergreening. While it seems like a rapid rescue, it is actually the foundation of this zombie land. The success of market systems can be discerned in a process called creative destruction, where competition in turn eliminates less productive firms and liquidation leads to auction and movement of land, labour and capital to more productive firms. This also clears up space for the newcomers.
The relief strategies adopted by the government and RBI aids the productive firms but also wrongly acts as the lifeline of zombie firms. When the government is generous enough to shower Rs. 2 trillion as rescue but not reverse theorgy of deficit financing and loan waive offs the following year, it sustains the harmful zombie land.
Historic happenings have proven the excessive ease of opening fiscal and monetary taps and the exact opposing difficulty in shutting them. Worthwhile in the Great recession, when the government cut the taxes in 2008-09, the fiscal deficit of India grew from 2.5& to 6.9% of the GDP. Post this, it became politically challenging to raise and reinstate taxes to balance the deficit, and the freebies and subsidies kept them alive, for more than a decade. That’s when the government investment shrunk the most. There’s no surprise in why the economy was slow paced even a year before Covid-19.
If we were to look up the greatest zombification and the resultant stagnation, it would be Japan. Japan was a fast developing and ever growing power house until in 1190 it was faced by financial crisis and recession. Instead of allowing companies to sink, the central bank provided for evergreen dud loans with extremely low interest rates, which did solve bankruptcies, but it is better remembered as the birth of myriad zombies. The winds of global boom revived the economy in 2000’s again followed by stagnation in 2010s. As its aggressive retaliation, the government raised its debt/GDP ratio to create a world record of 280% by lifting deficit financing measures. Leave alone corporate bonds, its central bank also started and continues purchasing corporate equity as its contribution to inject growth. If this policy breathes for several years, in an unusual attempt towards unwitting nationalization, the central bank of the country will soon be established as the top shareholder of majority companies. However, fact remains that Japan’s growth is challenged by stubborn zombification.
Interestingly, Europe too has embarked on a similar path. The central bank of Europe has reacted by printing and producing sums to save the sinking companies as well as countries. This move did benefit debt struck nations like Greece and Italy but curbed overall European growth. Just when Europe hoped to see a ray of hope, the world sunk in Covid-19.
The US has established itself as the most dynamic pick in the race of development, but it too suffered a setback in 2010s. Continuing the blunder tradition, the Fed printed dollars as huge as amounting to trillions to save its economy. The proliferation rather than profits was thus the fate of corporates living on increasing borrowings. When the Fed tightened funds over last two years, it was once again forced by Covid-19 to return to the same lane. The pandemic made the Fed to bulk print dollars and even purchase junk bonds. This in turn aids zombification. According to the Deutsche Bank securities, the zombie companies in USA have approximately doubled between 2013 and 2020, starting from a literal zero back in 1990 and a conservative approach.
The rescue package initiated by India has proved to the most horribly insufficient to undo urgent and immediate distress but is somewhere hopeful for managing fiscal deficits in the longer run. In a very wise move, this stimulus has emerged from RBI’s reversable schemes of pumping money rather than tax cuts which aren’t easily reversed. The crucial point is that due to this reversal, tough and tight measures must be taken to prevent zombification the following year.