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Throwing good money after bad

Lending to distressed firms that have little or no ability to repay the loans does not make sense

Rajeswari Sengupta & Anjali Sharma 

There is anecdotal evidence that banks in India have been financing distressed firms to delay the recognition of bad loans. Extending credit to firms that face temporary financial stress may be critical for keeping them operational and reviving them. However, lending to firms that are highly distressed and have little or no ability to repay these loans is tantamount to throwing good money after bad. This reduces the supply of bank credit to healthy, more productive firms; hides the true extent of balance sheet impairment; and delays resolution of firms’ distress. Such delays may ...

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First Published: Thu, June 08 2017. 09:35 IST