Impact of Debt Restructuring on Bank Loan Portfolio Quality

Prior studies examining the effects of debt restructuring on bank risk typically rely on conventional indicators such as non-performing assets (NPAs) or Z-scores. However, these backward-looking measures may fail to capture signals of credit deterioration, particularly in environments characterized by regulatory forbearance. In contrast, loan loss provisions (LLPs) incorporate both incurred and expected credit losses and reflect managerial discretion, thereby offering a more forward-looking and nuanced assessment of loan portfolio quality. To address these limitations, we develop a novel LLP-based specification to evaluate how debt restructuring affects bank risk, conditional on regulatory regimes and ownership characteristics. Using panel data on Indian banks from 2005 to 2024, our empirical strategy exploits exogenous shifts in the regulatory frameworks to identify differential impacts across regimes and bank types. Our findings indicate that while debt restructuring may temporarily suppress reported NPAs, its long-term effectiveness depends on the underlying motives and governance structures. In particular, state-owned banks exhibit greater risk-taking behavior relative to private banks, especially under forbearance regimes, highlighting the role of ownership and regulatory discipline in shaping risk outcomes.