Journal of Quantitative Economics

, Volume 3, Issue 1, pp 74–87 | Cite as

Collateralized Lending by Indian Banks: Some Explanations and Policy Implications

  • Abhaysingh Chavan
  • Rajendra R. Vaidya


This paper draws a parallel between the extent of unsecured lending that a bank does and the screening effort extended by the bank. Since unsecured lending requires screening on the part of the bank, higher the percentage of unsecured loans in total loans, higher is likely to be the screening effort while processing loan applications. Using panel data relating to banks in India, we find that on an average a higher extent of screening effort or unsecured loans is likely to be provided by banks that are large, have low level of non-performing assets, and are in the private sector. Further, persistence in the extent of unsecured lending seems to suggest that any change in unsecured lending/ screening effort is likely to be rather slow.


Banks Collateralized lending Screening effort 

JEL classification

E44 G21 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Arneflano, M., and S. Bond, 1991, Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, Review of Economic Studies 58(2), pp. 277–297.CrossRefGoogle Scholar
  2. Banerjee, A. V., S. Cole, and E. Dufio, 2003, Bank Financing in India, Mimeo, MIT.Google Scholar
  3. Berger, A. N., and G. F. Udell, 1990, Collateral, Loan Quality and Bank Risk, Journal of Monetary Economics 25(1), pp. 21–42.CrossRefGoogle Scholar
  4. Bester, H., 1994, The Role of Collateral in a Model of Debt Renegotiation, Journal of Money, Credit and Banking 26(1), pp. 72–86.CrossRefGoogle Scholar
  5. Black, J., D. de Meza, and D. Jeffreys, 1996, House Prices, the Supply of Collateral and the Enterprise Economy, The Economic Journal 106, pp. 60–75.Google Scholar
  6. Boot, A. W. A., A. V. Thakor, and G. F. Udell, 1991, Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results, The Economic Journal 101(3), pp. 458–472.CrossRefGoogle Scholar
  7. Buckley, F. H., 1986, The Bankruptcy Priority Puzzle, Virginia Law Review 72, pp. 1393–1470.CrossRefGoogle Scholar
  8. Chan, Y. S., and G. Kanatas, 1985, Asymmetric Valuation and the Role of Collateral in Loan Agreements, Journal of Money, Credit and Banking 17(1), pp. 84–95.CrossRefGoogle Scholar
  9. Chavan, A., and R. R. Vaidya, 2003, Financial Liberalization in India and the Bank Lending Channel of Monetary Transmission, South Asia Economic Journal 4(2), pp. 221–243.CrossRefGoogle Scholar
  10. Coco, G., 2000, On the Use of Collateral, Journal of Economic Surveys 14(2), pp. 191–214.CrossRefGoogle Scholar
  11. Leeth, J. D., and J. A. Scot, 1989, The Incidence of Secured Debt, Evidence from the Small Business Community, Journal of Financial and Quantitative Analysis 24(3), pp. 379–394.CrossRefGoogle Scholar
  12. Manove, M., A. J. Padilla, and M. Pagano, 2000, Collateral vs. Project Screening: A Model of Lazy Banks, Rand Journal of Economics 32(4), pp. 726–744.CrossRefGoogle Scholar
  13. Mohan, Rakesh, January 2003, Transforming Indian Banking: In Search of a Better Tomorrow, Valedictory address delivered by Dr, Rakesh Mohan, Deputy Governor, Reserve Bank of India at the Bank Economists’ Conference 2002, reprinted in Reserve Bank of India Bulletin, pp. 9–18.Google Scholar
  14. Picker, Randal C, 1992, Security Interests, Misbehavior and Common Pools, Chicago Law & Economics Working Paper No. 5 (2d Series).CrossRefGoogle Scholar
  15. Sarkar, Jayati, 1999, India’s Banking Sector: Current Status, Emerging Challenges and Policy Imperatives in a Globalized Environment, chap, in J. Hansen and S. Kathuria (edited) India: A Financial Sector for the Twenty-first Century, Oxford University Press, Delhi pp. 71–131.Google Scholar
  16. Sen, K., and R. R. Vaidya, 1997, The Process of Financial Liberalization in India. (Oxford University Press, Delhi).Google Scholar
  17. Siebrasse, Norman, 1997, A Review of Secured Lending Theory, Mimeo, University of New Brunswick.Google Scholar
  18. Trautwein, H., 2000, The Credit View, Old and New, Journal of Economic Surveys 14(2), pp. 155–189.CrossRefGoogle Scholar
  19. Triantis, George G., 1992, Secured Debt under Conditions of Imperfect Information, Journal of Legal Studies 21, pp. 225–258.CrossRefGoogle Scholar

Copyright information

© The Indian Econometric Society 2005

Authors and Affiliations

  • Abhaysingh Chavan
    • 1
  • Rajendra R. Vaidya
    • 2
  1. 1.The Stock Exchange (BSE), FortMumbaiIndia
  2. 2.Indira Gandhi Institute of Development ResearchMumbaiIndia

Personalised recommendations