In addition, a lower level of NPLs improves the allocation of credit from non-viable firms that are kept artificially alive to viable firms. According to research by the OECD, when more industry capital is sunk in non-viable (“zombie”) firms, the average viable firm undertakes less investment than otherwise1.
Hence, a rise in the fraction of non-viable firms in the economy crowds out the growth of more productive firms, thus reducing the efficiency of capital allocation and causing a slow-down in multifactor productivity growth.