Distortions in land markets and their implications for credit generation in India

Abstract

Ideally land and buildings ought to be preferred collateral for lenders in India, as in many other countries, due to the ease of valuation and disposal of land in the event of default. Data shows that land is a collateral in a large proportion of loans in India, yet the several structural, regulatory and information-driven distortions that afflict Indian land markets force lenders to adopt conservative policies ex-ante, impacting both the availability of credit and the collateralization of land. We examine some of these distortions and highlight their significance to the current debate on reforming bankruptcy framework in India. The first part of the paper discusses structural, regulatory and informational gaps that limit lenders ability to lend against land as well as recovery after default. In the second part, we propose some opportunistic and structural reforms in the land markets that could effectively monetize land in credit markets.