The role of financial and physical assets as substitute or complementary to land as collateral in credit market: Evidence from Indian households

Land is considered as one of the most widely prevalent forms of collateral in credit markets of developing economies. It has also been observed that the landless segment do get loans. Using a nationally representative data for Indian households, the present study examines whether assets other than land, that is, physical and financial assets enable the landless to obtain loans. We also study if there is any association between different types of assets and purpose of loan, which represents immediate and direct return from projects. We introduce instrumental variables to tackle the issues of endogeneity in a Heckman Probit model (sample selection model). Results suggest that physical assets act as substitute to land not only in getting credit from any source but also particularly in getting formal credit. However, financial instruments serve dual roles: these are both substitutable and complementary to land in the formal sector. Further, a complementarity is observed between land and productive investments in formal sector. On one hand, our study explains why looking beyond land as collateral is important for households with limited immovable property while on the other hand some of our findings re-establish the dominance of land.