The Role of Bank CEOs in Zombie Lending During a Crisis: Evidence from India

Prasanna Tantri

♦ A well-documented pattern of bank lending during crises is the allocation of credit to low-quality firms at the expense of productive firms, leading to inefficient resource allocation at the macro level. We investigate the role of bank CEOs in affecting such distortions during crises using the strictly enforced age-based retirement policy of Indian government-controlled-partially-privatized banks. We find that banks that experience a CEO turnover during crises are less likely to bail out low-quality borrowers as the new CEO has a lower incentive to do so. Consequently, the efficiency of credit allocation improves, and the zombification of the economy reduces.

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