Banking Article, Banking Finance 2022, Banking Finance July 2022

Unlocking the land markets in India : A step towards better credit culture and Urban Infrastructure

Introduction

A constitution as voluminous as ours surprisingly refers to land only fleetingly. Spread over 395 articles in 22 parts and eight schedules ,the subject of land comes up in only four parts .One of the important provisions was The Right to Property,a fundamental right under Article 19 and Article 31 of the Indian Constitution.This article guaranteed the citizens right to acquire,hold and dispose of the property.However this fundamental right was changed to a constitutional right by the 44th constitutional amendment act,1978.Property is an institution governing the control over scarce resources in the hands of the individual.Citizens have the right to own and possess the property and also the put the property into use for credit dispensations.In most countries,lenders prefer land as a collateral for the four characteristics –Easy locatibility,Easy Identification,Easy Valuation and High Liquidity.Land,as per the Seventh schedule of the cosdtitution is pre dominantly a state subject.The Indian land market,is therefore a series of state land markets with varying levels of land administration rules,laws,revenue and usages.

Land as a collateral in India

Traditionally in finance,land has been considered to be good collateral for three main reasons-it is easily traceable and identifiable and cannot be easily siphoned off as easily as movables,it is easily reusable and unlike movables its value does not erode over time(at least in India).The heterogeneous laws across states and the fragmented nature of land markets in India has significantly increased the cost of collateralization-the cost incurred by borrowers and lenders in the provision and acceptance of a collateral and its subsequent liquidation upon default.Assets provided as collateral have certain desirable characteristics.Banks prefer assets whose title and value are easily determinable,while borrowers prefer assets where there is maximum consideration of value of the assets.Another attribute of land as a collateral is as Binswanger(1986) calls it as appropriability-the ability to liquidate collateral with minimal loss to lenders.Formal institutional lenders ,such as banks provide a variety of loans against land and building.Agricultural production and investment loans are provided against the security of rural lands.Personal loans against property for various personal purposes-marriage,travel and tourism,health ,education are another example.As per NSSO 70th round figures(All India Debt and Investment survey),as shown in Fig.1,Land and Building together accounted for  about 90% of the total value of assets at the national level for indebted households in both rural and urban areas.It can be argued that over time land has emerged as an assured and ‘bank’able asset relied equally upon by both borrower and the lender.As per this survey,31.2 % of all rural households and 22.4% of all urban households were in debt.As for collateral,surprisingly,the same survey informs,just  about 3% of total loans in rural households and 4.7% loans in urban households used landed property as collaterals.In contrast,even in rural areas,assets such as Gold and Jewellary are being increasingly used more often than land for accessing credit.

So what is plaguing Indian land Markets ?

The Indian Land market is currently in a state of distortion due to a  variety of factors such as :

  1. Socio Economic Barriers  :Specially in rural areas,land is seen as an emotional asset for the household whose use is invoked only as a last resort.This increases the likelihood of the farmer falling to various non-institutional players like moneylenders as banks in general insist on keeping some form of collateral.
  2. Heterogenity : The Indian land market is a sum-total of smaller sub-markets operating at state and UT levels ,which are highly fragmented and unorganised.The Quality of land records also varies from state to state and from type-to-type of the land .For instance,land recods may be different for personal land-holdings,for common land(Government or village lands) and also for lands that have been given away as a result of various land-distribution movements.
  3. Quality of Land Records : Multifarious government agencies are responsible for the upkeep of recods related to land.For Ex-the Revenue deptt,the Survey Deptt.,Registration Deptt all keep records related to various aspects of land-location,physical characteristics of land,incidence of tax,et all.Unfortunately most of these agencies work in isolation and often under archaic laws that have not evolved with the times.Furthermore,the information collected from these various agencies is difficult to collate and capture for a holistic view-taking point of view.Most of the lenders spend precious man hours in deciphering the data and on the basis of that take any credit decision.
  4. Unclear Titles : It is not surprising that in such an environment of vagueness of information land titles are frequently contested in our courts,which are brimming with pending cases of disputed property .A study by consultancy firm McKinsey suggests that as much as 90 percent of land parcels in India are prone to disputes over ownership.When the titles are not clear,the lender runs the double risk of customer not being the owner of the collateral as well as the risk that the title may not get easily transferred to the lender in case of borrowre’s demise.
  5. Prohibitory Costs : Cost of collateralization as well as Due-Diligence before and after the process is prohibitive for the lender.The rates of registration and stamp duties vary from state to state and are often considered to be highest in the world.Moreover liquidity of lands with disputed titles may also be questionable.

All these factors either in combination or individually affect the suitability of the land to be accepted or preferred form of collateral

Unlocking India’s Land Markets and other innovative solutions to unlock value of land as an asset

1.Titling System :

For many decades now we have been debating about graduating to Torrens land titling system .Some of the key features of Torrens system are:

1. The Mirror Principle :It indicates that the register of titles MIRRORS the reality.

2. The curtain principle:It suggests that there is a curtain over the past and a register of titles is full-proof evidence that the title at present is clear and unambiguous and there is no need to raise the curtain meaning the past may not be investigated.

3. The Assurance Principle :It guarantees indemnification by the stateagainst errors in title register.The Land title certificate issued to the land/property owner under this system shall serve as a certificate  of full,indefeasible and valid ownership in the court of law.

Guaranteed titling systems have been developed and are prevalent in countries such as Australia, New Zealand  Singapore and UK. The system,which guarantees land titles and ensures compensation by the state in case of any disputes is a marked contrast to Indian land titling system which is presumptive and is based on title deeds and property tax receipts to prove land ownership.Often these title documents do not follow the Mirror principle –which states that the land document must reflect the REAL ON GROUND SITUATION.The Union Government is preparing draft land Title Act 2019 which should pave way for conclusive land titles and that in turn should pave way for easy access to credit for farmers and also reduce a large number of land related litigations.

2.Unlocking value of vacant public land : The biggest property owner in the country,

Government of India ,may not always have exact information about the total land ownership it has.Unfortunately, this scenario often occurs.However the ownership of large tranches of government land can be incentivised by the joint venture between public and private players.This may take the form of any of the following:

a. Leasing : short-term leases,like parking-spaace contracts etc where the lessee always does not have to make any significant capital investment allows retaining of land as public assets and also enables intelligent recycling of land,as is done in China.

b. Equity– Use of land as government equity could be explored

3. Smart Planning :A completely risk-averse model would suggest to follow a conventional lease model which retains the land and also gives steady revenues accruing.Examples include small lost of land could be leased out to banks for ATMs etc or to local Resident Welfare Associations for playgrounds purpose etc.

4. Some Practical Reforms from bankers perspective : The whole gamut of valuations and other mortgage data existingly available with the banks can be capitalized upon.There can be a creation of a  shared  technological platform of all banks,Financial Institutions that captures all valuation data-both current and historical.Such data could include standardized geo-spatial information alongwith independant valuations.This is offcourse similar to existing CERSAI information except that it also contains valuation information unlike CERSAI.This can be useful in the following two ways:

a. Consistent information on changes in valuations that lenders can use to MARK TO MARKET their collateral values

b. Provision of benchmark values(on valuations)expecially of land located in remote areas where lenders have no existing exposure to.

4. Easy access to governmental data : Electronic provision of all governmental data is already ongoing in many states with varying stages of completion under various e-governance initiatives.However the cost of digitizing humongous amounts of historical data is both time consuming and cost-prohibitive.One quick solution could be scanning existing governmental records and display them as images

5. Land Ranking : First a comprehensive database/portal of all available land parcels in the country should be prepared and the existing valuation data available with banks/FIs should be collated with it.The ‘clean’ land parcels may be ranked such that overtime there is an attribute-based ranks given to parcels of land .It is a fact that borrowers trust lending institutions for clean investigation of title and any deficiency,iff existing,to be unearthed by the bank.Over time,mortgaged property and properties that have been evaluated by lenders’credit processes are likely to have a higher ranking.Maintenance of a database of such clean properties enables these properties to undergo a smoother,quicker and more confident process of scrutiny.This improves the overall credit cycle.

6. Governmental Reforms :India is said to be having highest rates of stamp duty in the world. The rates vary from state to state.During 2006-07 the stamp duty rates was between 12% to 15% while the same in other countries stood between 1-4%.Further the stamp duty is calculated on the cost of property and in the event of it being too high the stamp duty could also be prohibitive.In addition,the registration fees is additional 0.5-2%.This escalates the cost of property transactions leading people to avoid registration.Many such transactions like heriship partitions etc do not get registered.As a result the record shows outdated data .Under the Jawaharlal Nehru National Urban Renewal Mission(JNURM),one of the targets was to rationalise stamp duty and bring it down to 5% by 2018.Some states have followed suit and reduced their stamp duties for ex –Delhi and Mumbai to 6% and 5% respectively.Simlarly,the Financial Sector Reforms Commission(FSRC) had recommended to amend Registration Act,1908 and Indian Stamp Act,1899 to not require the payment of stamp duty for registration of certain property transactions.States should reduce the stamp duties present levels of 15% to the level of 3-5%. However,since stamp duty forms a large part of state government’s revenue the move must be with adequate planning and in a phased manner.

Conclusion

While conclusive titling has been rightly pointed out as the solution to the land distortion problems,several systemic steps need to be taken before this becomes operational in India.These steps include amending laws across centre and states,streamlining administrative changes at state level to enable uniformity in collection and mainatenance of land data and ensuring constant updation and accessibility of land data. India has made a limited use of unlocking and channelizing land value to finance urban infrastructure.Some cities and states have made a start.For ex –Mumbai Metropolitan Regional Development Authority project of an alternate business district :the famed Bandra Kurla Complex.Andhra Pradesh is another example of a state which has taken number of steps to tap the gains in value from its infrastructure development projects.

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