Abstract

This paper investigates the micro-level link between judicial quality and economic outcomes. It uses a loan-level data set from a large Indian bank to estimate the impact of a new quasi-legal institution, Debt Recovery Tribunals, aimed at accelerating banks? recovery of non-performing loans. I use a differences-in-differences strategy based on two sources of variation: the monetary 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 10 percent. The effect is significant within loans as well: for the same loan, installments that become due after the loan becomes treated are more likely to be paid upon time than those that become due before. Furthermore, interestrates on loans sanctioned after there form are lower by 1 to 2 percentage points. These results suggest that legal reform and the improved enforcement of loan contracts can reduce borrower delinquency, and can lead banks provide cheaper credit. Thus the paper illustrates a microeconomic mechanism through which improvements in legal institutions might stimulate economic growth.

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Citation

Visaria, Sujata. "Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India." Chazen Web Journal of International Business (2005). http://www.gsb.columbia.edu/chazen/webjournal.

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