India’s zombie firms are fewer, but distress persists: India’s corporate sector has fewer companies struggling to service their debt than it did a decade ago. Dun & Bradstreet’s study of nearly 6,000 listed companies found that the share of zombie firms fell to 5.5% in 2025 from 8.1% in 2017. The combined share of stressed and zombie firms was 14.2% in 2025, compared with a peak of 23.5% during the 2015-25 period.
The decline is welcome. But it does not mean that corporate distress has been eliminated. About 20.4% of the companies that could be assessed had entered zombie status at least once between 2015 and 2025. Financial weakness is therefore much more widespread over a business cycle than the 5.5% figure for 2025 suggests.
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Dun & Bradstreet defines a zombie firm as one whose interest coverage ratio remains below one for three consecutive years. A stressed firm is one whose ratio falls below one in any single year. The ratio is earnings before interest and tax divided by interest expense. When it is below one, operating earnings are insufficient to cover interest costs.
A single year of weak interest coverage does not make a company unviable. A manufacturer may be hit by a sharp rise in input costs, a project may be delayed or demand may fall for a period. The three-year test is intended to identify companies whose inability to service debt has persisted rather than those facing a temporary setback.
India has had plenty of both kinds of problems. The global financial crisis exposed weaknesses in corporate and bank balance sheets. The investment boom that followed left some infrastructure and construction companies with high debt and cash-flow projections that proved too optimistic. When projects were delayed or expected revenues failed to materialise, banks were left carrying a large stock of stressed loans.
The clean-up has taken years.
The Insolvency and Bankruptcy Code, enacted in 2016, changed the framework for dealing with companies that could not meet their financial obligations. Creditors gained a formal route to seek resolution or liquidation instead of allowing troubled borrowers to remain in limbo indefinitely.
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The results are substantial, although the process has not always been quick. By March 2026, 1,419 corporate insolvency cases had ended with approved resolution plans, and creditors had realised about ₹4.32 lakh crore through those plans.
The broader improvement in corporate debt-servicing capacity is also visible in RBI data. The aggregate interest coverage ratio of listed private non-financial companies rose to 6.5 in the March 2026 quarter. Gross profits increased faster than interest expenses. At the same time, the RBI reported an increase in the share of financially vulnerable companies. A stronger aggregate balance sheet can therefore coexist with serious problems in individual firms.
Dun & Bradstreet’s figures show another reason to be careful about declaring victory. Among 764 zombie companies for which the 2025 position could be established, about 55% showed some evidence of recovery. The study found that 38.9% had fully recovered and 16% had recovered temporarily, while 32.3% remained zombies. The categories do not account for the entire group, so they cannot be treated as a complete account of what happened to all 764 companies.
A company leaving the zombie category does not necessarily tell us why it recovered. It may have increased earnings, reduced its debt burden or benefited from improved business conditions. Nor does the zombie measure tell us whether a recovered company has become a strong business. It tells us that its interest coverage has improved sufficiently to move out of the classification.
That distinction is important for banks and investors. Repeated refinancing can keep a weak company alive while postponing the recognition of losses. Money committed to such a borrower cannot be deployed elsewhere. If the company eventually fails, the lender may also find that the value of its assets has fallen during the intervening years.
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India’s zombie firms and insolvency code
This is where insolvency law meets the wider problem of productivity. A company that has a viable business but a temporary financial problem should have a chance to restructure. A company with no credible path to viability should not consume scarce credit indefinitely. The economic cost of getting that judgment wrong can be high in either direction.
India’s principal weakness remains the time taken to make that judgment through the formal insolvency system. NITI Aayog reported that the average corporate insolvency resolution process took 713 days as of March 2025, against the statutory limit of 330 days, including extensions. Judicial delays, litigation and the complexity of cases have contributed to the gap.
Delay can change the economics of a case. A company may lose customers while a resolution process drags on. Employees can leave. Equipment can lose value. Working capital can become harder to obtain. A business that might have been rescued at the beginning of the process can become a liquidation case by the time a resolution plan is approved.
There is a second cost. Banks and other creditors cannot recycle capital tied up in a prolonged restructuring. The problem is particularly relevant when the economy is entering a period of stronger investment and companies with sound projects are looking for finance.
India has therefore made progress on corporate distress without solving the problem. The fall in zombie firms is one indication that debt-servicing capacity has improved. The IBC has created a route for resolution that did not exist in its present form before 2016. But the 20.4% of companies that entered zombie status at some point during 2015-25 shows how many firms can experience prolonged financial weakness even when the economy as a whole is performing better.
The next test will be whether the system can deal with distress before value is destroyed. Viable companies need access to restructuring and finance when their problems are temporary. Companies that cannot recover need an exit process that does not take years. The difference between the two is ultimately a question of how quickly capital can be put to more productive use.