engleski

Lending activity and credit supply in Croatia during the crisis

Banks sometimes respond to deterioration in the quality of their placements by extending loan repaymentperiods to borrowers in default and hiding the actual quality of placements, hoping that difficulties ofborrowers are only temporary. This practice is termed evergreening or zombie lending. Due to a prolongedrecession and stagnation coupled with relatively high share of non-performing loans, such practice may beoccurring in Europe nowadays. We use data for Croatia, a country that fought recession for several years, tostudy the existence of zombie lending practice. We analyse credit supply to individual enterprises in Croatiaat the beginning and in the midst of the recent crisis and determine to what extent zombie lending is presentand how lending behaviour changed during the crisis period. Results of the estimated regressions indicatethat there is evidence that some of the loans being prolonged are the result of zombie lending practices. Thisimplies that policymakers should be aware of the possibility of such a relationship between banks and firms, as well as of its impact, and should try to minimise it.

Zombie lending ; Credit supply ; Micro level data

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