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Property Rights Documentation in Determining Credit Availability for Informal Firms: A Study of Indian Firms

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Abstract

Evidence suggests that the unorganised manufacturing units are extremely credit starved. The unavailability of credit for such firms could be a direct result of lack of documentation of property rights which in turn renders the assets of the firm non-collateralizable. The absence of this essential representation of assets, which includes machinery, building, even the land on which the firm is set up, leads to problems of moral hazard, giving rise to asymmetry in information thereby restricting the usability of physical assets in generating capital. We attempt to study the nature and extent of impact that absence of property rights has on the credit availability of informal firms in India and found improper documentation of property rights results in significant credit crunch for the unorganised production units. We also observed that under such constraint the small informal firms tend to work as outsourced units for other firms thereby leading to intra-country production reorganization.

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Source: Own Calculations

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Notes

  1. The survey covers the whole of the Indian Union except (i) interior villages of Nagaland situated beyond 5 km of the bus route and (ii) villages in Andaman and Nicobar Islands which remain inaccessible throughout the year.

  2. An enterprise is defined as an undertaking which is engaged in the production and/or distribution of some goods and/ or services meant mainly for the purpose of sale, whether fully or partly. An enterprise may be owned and operated by a single household or by several households jointly, or by an institutional body.

  3. See Kar and Dutta (2014) for Indian context.

  4. The NSSO reports another categorization of enterprises ‘Casual’; however, we do not consider that categorization as such enterprises are totally absent in some of states.

  5. See Marjit (2012) for similar arguments for trade between nations and Dutta and Dhar (2020) for trade between formal and informal firms.

  6. To choose between a logit and probit model, Aikaike Information Criteria (AIC) and Bayesian Information Criteria (BIC) was used. Since the result suggested no difference between the two models, logit estimation was done.

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Appendix

Appendix

See Table 7.

Table 7 Results of first stage regression of 2SLS.

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Dutta, M., Dhar, N.S. Property Rights Documentation in Determining Credit Availability for Informal Firms: A Study of Indian Firms. J. Quant. Econ. 19, 123–138 (2021). https://doi.org/10.1007/s40953-020-00221-z

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