Seminar: "Creditor Rights and Allocative Distortions – Evidence from India"
Speaker: Dr. Nirupama Kulkarmi, Research Director, CAFRAL, Research Department
Abstract: Efficient exits ensure resources are forced away from unproductive firms. I exploit a collateral reform in India that made it easier for secured creditors to seize defaulters' assets thereby making the process of exit of firms efficient. Post the passage of the law, banks cut credit to low-quality firms and increased credit to high-quality firms. Subsequently, low-quality firms cut capital expenditure and employment. This is partly attributable to a reduction in credit to otherwise insolvent borrowers (zombies). Importantly, the resulting decongestion increased secured debt, employment and capital expenditure of non-zombie borrowers that operated in previously zombie-dominated industries and reallocated labor and capital away to firms with higher marginal products of labor and capital.