The Distributive impact of reforms in credit enforcement: Evidence from Indian debt recovery tribunals

Abstract

It is generally presumed that strengthening the enforcement of lender rights expands the set of incentive compatible loan contracts, resulting in increased access to credit for all types of borrowers. This is based on an implicit assumption of inlnitely elastic supply of loans. With inelastic supply, strengthening enforcement can result in greater exclusion of poor borrowers from credit markets and a reallocation of credit from poor to wealthy borrowers. Using a dataset of capital project loans given by a large Indian bank to lrms of varying asset sizes, we lnd evidence of such adverse distributional impacts of a reform to strengthen lender rights implemented across Indian states in the 1990s.