Planet & Profit

Key Takeaway: When too many unprofitable firms stay afloat, they sap capital, suppress innovation, and undermine economic resilience.

In the decades since Japan’s “Lost Decade,” economists have warned of zombie companies—firms that earn just enough to pay interest but never generate enough profit to reduce debt or invest in growth. These corporate “living dead” persist thanks to lenient lending, government bailouts, or regulatory forbearance. While they may save jobs in the short term, their long-term cost is steep: thousands of resources wasted on unproductive enterprises, credit diverted from healthier firms, and productivity dragged down by entrenched inefficiencies.smefutures

Defining the Zombie

A company earns its “zombie” label when it meets three criteria at once:

1. Interest Coverage Below One: Operating income covers less than 100% of interest expenses for at least three consecutive years
2. High Leverage: Debt-to-equity or debt-to-assets ratios exceed industry medians
3. Longevity: More than a decade in business, ruling out newborn ventures still in investment mode

Under this yardstick, zombies can limp along—refinancing maturing liabilities rather than repaying principal—yet never invest in innovation or capacity expansion.smefutures

Global Trends: A Growing Menace

The International Monetary Fund estimates that, by 2021, listed zombie firms accounted for over 10% of all listed companies worldwide, up from 6% in 2000. When weighted by debt, zombies commanded a similar share, illustrating their outsized claim on credit markets. Most zombies concentrate in real estate and energy, sectors prone to boom–bust cycles, but no industry is immune. Low interest-rate regimes and ample liquidity have repeatedly enabled unhealthy firms to dodge failure, setting the stage for muted productivity and fragile recoveries after downturns.elibrary.imf

India’s Zombie Burden

In India, zombie firms have emerged as a growing worry for bankers and policymakers. The Reserve Bank of India’s Financial Stability Report highlights that unprofitable, debt-laden corporates absorbing fresh loans—without generating new investment—now account for roughly 10% of total non-financial corporate debt. These firms:timesofindia.indiatimes

• Generate negative returns on assets over successive years
• Borrow more to pay interest rather than fund expansion
• Exhibit greater sensitivity of borrowing costs to monetary policy changes than healthier firmstimesofindia.indiatimes

While the RBI notes that banks’ tightened risk-based supervision and the insolvency regime have curbed some credit flows to zombies, the dam has yet to break entirely.

Notable Indian Zombies

Public-sector stalwarts and telecom majors make the zombie roster.

• Air India: Years of operating losses and deferred government cash infusions have left it reliant on fresh state guarantees to refinance debt.
• BSNL & MTNL: Stagnant subscriber bases and pension liabilities mean both telecom PSUs consistently report interest-coverage ratios below unity.
• Vodafone Idea Ltd.: Deferred spectrum obligations (over ₹2.2 trillion) and mounting losses have trapped it in a debt spiral, threatening network upgrades and service continuity.economictimes

Economic Costs of Zombie Proliferation

The persistence of zombie companies imposes four main burdens:

1. Misallocated Credit: Banks channel scarce capital to serve interest bills, rather than underwrite viable startups or fund expansions.
2. Stunted Productivity: By propping up inefficient firms, zombies prevent resources (labour, capital, managerial talent) from flowing to more productive uses.
3. Dampened Monetary Policy: Conventional rate cuts may fuel evergreening of distressed credits, reducing stimulus efficacy.
4. Erosion of Market Discipline: When insolvency processes or regulatory forbearance shield failing firms, healthy competitors face unfair pricing and capacity pressures.

These drag on India’s ambition to become a $5 trillion economy: credit-starved innovators struggle to scale, while entrenched zombies prolong the clean-up of bad debts.

Strategies to Exorcise Corporate Zombies

Clearing the economic undead requires a mix of policy rigor, regulatory clarity, and market-based solutions:

1. Strengthen Insolvency Mechanisms:
   • Expedite resolution timelines under the Insolvency and Bankruptcy Code, with robust enforcement of bankruptcy verdicts.
   • Empower creditors to initiate proceedings swiftly when interest coverage dips below critical thresholds.
2. Night-Watchman Banking Supervision:
   • Deploy real-time borrower analytics to flag churn of interest-only refinancings.
   • Impose penal provisioning for creditors perpetually rolling over “zombie” exposures.
3. Credit Market Diversification:
   • Foster debt-to-equity conversions in stressed firms to reduce leverage and align interests.
   • Expand alternative financing (venture debt, private credit) for high-potential enterprises, minimizing reliance on bank lines.
4. Productivity and Innovation Linkages:
   • Tie refinancing packages or government support to demonstrable capex plans and technology upgrades.
   • Incentivize mergers and acquisitions that consolidate viable assets from weak firms into stronger entities.
5. Transparency and Early Warning Signals:
   • Mandate public disclosure of interest-coverage ratios and key financial health metrics for all large borrowers.
   • Issue quarterly “zombie watch” bulletins, spotlighting at-risk sectors and firms.

Turning the Tide

Zombie companies may prolong the agony of corporate distress, but they need not become permanent fixtures. By reinforcing market discipline, sharpening insolvency frameworks, and channeling credit toward growth drivers, India can reclaim scarce capital for the dynamic enterprises that power job creation and productivity gains.

Ultimately, creative destruction—the economic process where outdated businesses make way for innovators—is not a byword for callousness but the lifeblood of sustained growth. Exorcising the zombies paves the path to a more vibrant, resilient, and prosperous economy.