The link between judicial quality and economic outcomes: Micro-level evidence from India
This dissertation investigates the effects of legal reform that facilitated the recovery of non-performing loans by banks in India.
Chapter 1 and 2 study a new institution known as Debt Recovery Tribunals (DRTs), tribunals which follow a new streamlined legal procedure to process legal suits filed by banks against defaulting borrowers. In Chapter 1, I describe the background against which DRTs were established and the pattern of DRT establishment, and present a simple theoretical model to explain their expected effects. In Chapter 2, I present empirical evidence using two alternate data sets. The methodology relies on two aspects of the reform. One, different states in India received DRTs at different times. Two, DRTs are most useful for recovering long-term, secured loans. Specifically, only claims larger than Rupees 1 million (≈US$ 20,000) can be filed with DRTs. These two features allow a differences-in-differences strategy to identify the effects of DRTs. First, building on joint work with James Costantini, I use bank-level data. I find that for public sector banks, DRTs led to slower growth of non-performing loans. Next, I employ a more rigorous empirical strategy on loan-level data from a large bank with a national presence. I find that corporate borrowers are less likely to be delinquent in loan repayment if they are exposed to DRTs. Further, I find that new loans tend to be cheaper after DRTs are established.
Finally, in Chapter 3, I examine the effect of another legal reform affecting the Indian banking sector, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) law. Inter alia, this law allows banks to recover secured loans without a court order by directly by seizing collateral. I use bank-level stock price data to perform event studies on three different events relevants to the SARFAESI reform. For two of the three events studied, I find strong evidence of a positive effect on banks. I also examine patterns in the response of banks according to bank characteristics such as ownership, proportion of secured lending, and non-performing loans.