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

Abstract

Land and buildings are a preferred collateral for lenders in India due to its ease of valuation and disposal in the event of default. Yet several distortions afflict Indian land markets that make this exercise non-trivial. These distortions - some structural, some regulatory and some information driven - are costly and have far reaching implications on credit availability as lenders adopt conservative policies ex-ante to mitigate these costs. We examine some of these distortions in the Indian land markets in this paper 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 liquidate after default. In the second part, we propose some opportunistic and structural reforms in the land markets that could enable borrowers to effectively monetize land in credit markets.