Property Rights Documentation in Determining Credit Availability for Informal Firms: A Study of Indian Firms

Evidence suggests that the unorganised manufacturing units are extremely credit starved. The unavailability of credit for such firms could be a direct result of lack of documentation of property rights which in turn renders the assets of the firm non-collateralizable. The absence of this essential representation of assets, which includes machinery, building, even the land on which the firm is set up, leads to problems of moral hazard, giving rise to asymmetry in information thereby restricting the usability of physical assets in generating capital. We attempt to study the nature and extent of impact that absence of property rights has on the credit availability of informal firms in India and found improper documentation of property rights results in significant credit crunch for the unorganised production units. We also observed that under such constraint the small informal firms tend to work as outsourced units for other firms thereby leading to intra-country production reorganization.