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Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India

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  • Sujata Visaria

    (Institute for Economic Development, Boston University)

Abstract

This paper investigates the micro-level link between judicial quality and eco- nomic outcomes. It uses a loan-level data set from a large Indian bank to es- timate the impact of a new quasi-legal institution, Debt Recovery Tribunals, which are aimed at accelerating banks' recovery of non-performing loans. I use a dfferences-in-dfferences strategy based on two sources of variation: the mon- etary threshold for claims to be eligible for these tribunals, and the staggered introduction of tribunals across Indian states. I find that the establishment of tribunals reduces delinquency in loan repayment by between 3 and 11 percent. The ffect is statistically significant within loans as well: for the same loan, in- stallments that become due after the loan becomes treated are more likely to be paid up on time than those that become due before. Furthermore, interest rates on loans sanctioned after the reform are lower by 1.4-2 percentage points. These results suggest that legal reform and the improved enforcement of loan contracts can reduce borrower delinquency, and can lead banks to provide cheaper credit. Thus the paper illustrates a microeconomic mechanism through which improve- ments in legal institutions might affect credit market outcomes.

Suggested Citation

  • Sujata Visaria, 2006. "Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-157, Boston University - Department of Economics.
  • Handle: RePEc:bos:iedwpr:dp-157
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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