Clean up land records: Let the financial system spearhead the change

The first step in this direction would be to start with the land that has already been collateralised in the formal financial system

Real reforms work when in­ce­ntives of multiple stakeho­l­ders are naturally aligned. Animal spirits don’t get un­leashed when animals are not allowed to follow their instincts. The reforms of the 1990s got that right and we stro­ngly believe that the recent announcement to allow farmers to do what is be­st for them will also work for the same reason. They work because it is in the best interest of most of the participants to make it work.  

As millions of small businesses and households plan for the post-Covid wo­rld, many are likely to lean on the only asset that they own — land — to secure themselves financially. In many re­s­pe­cts, issues in land markets mirror those that we see in the agriculture sector. For one, both need states to resolve them under our Constitution. The states nei­ther have the same incentives nor have similar resources to address these is­s­u­es. The resultant hairball of policies and procedures have slowed our growth as one nation, though other factors like capital and labour have remained un­shackled for a few decades now. The main stakeholder, be it a farmer or a landowner, is often left to face the consequences of these distortions. It was, therefore, encouraging to finally see the government act to maximise the interests of the key sta­keholder.

The current state of our land record keeping has not kept with changes in time and in our aspirations for the ec­onomy. But this has not kept us from dreaming about block chain and other new age tools that advanced countries use to manage their land markets.  

Poor records add cost and risk to lenders who want to lend against land. Credit is, therefore, rationed and conservatively provided as a result. Is there a way to make lenders lend more aga­inst the same piece of land? Can we now push changes that are long pending?

We present a simple approach to clean up land records quickly. There is a lot of land that has already been collateralised in the formal financial system. There is no clear estimate of the amount of land that has gone through the financial system, but we believe it is likely to be around 30 to 40 per cent of the monetisable land. This means that we already have a large part of our land bank for which some due dilige­nce has already been done by banks and NBFCs. Can we start with these for our exercise? Can we incentivise the formal financial institutions to create a land register document with all the relevant information including the strength of the title?

What we are proposing is a land register that is to be created and used by financial institutions for their own purpose. There are two close analogies to our proposal — dematerialisation of stock records and creation of borrower credit profiles. Both were pushed by the government to ensure that our re­cord-keeping does not come in the way of our economic growth. While the fo­rmer was easier as only a few institutions were involved, the latter was a classic case of incentivising a broad array of financial institutions to seek such a record for reducing their risk. Dematerialisation has helped take risk off the table for owners and lenders (against shares) alike. Similarly, de­s­pi­te not being mandatory, credit history is now a pre-requisite for anyone considering borrowing from the formal financial system. It is  self-sustaining as banks can now be more objective about who to give credit to and borrowers can shop for a lower interest rate to maximise their superior creditworthiness.

Since our proposal requires banks to use information they already possess, it should be relatively quick to get started. Our land register is similar to a securitised receipt of land and its ow­nership financial institutions would be comfortable to lend against. Like de­positories in the stock market, there could be incentives for independent players to update these records for a fee. The updating will be initiated by borrowers at their expense since without updating they are less likely to get credit.

There is minimal state interven­tion needed since it does not infringe the sovereignty of the government over the land records. The current process of registering liens or mortgages could continue though their need wou­ld be reduced if such information is already available in this new record. The use of technology like block chain to ensure integrity through distributed responsibility becomes easier in this model as the records are clean and standardised to suit the purpose of the financial system. With lower risk, ba­nks are likely to be less conservative in their loan-to-value ratios and could lower their interest rates as well.

In essence, what we are proposing is to leverage land records that are already relatively clean to build a system around, rather than force a top-down approach to clean up all land records as has been the case until now. By incentivising the financial system to spearhead this transition and the borrowers to seek it on their own, we could avoid problems that have pla­gued such land reforms before. 

(Concluded. The first part appeared on Wednesday)

Krishnan is a retired civil servant and Panchapagesan teaches at IIM Bangalore; Madalasa V, an independent researcher, contributed to this column