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The interest rate charged on loans, also referred to as cost of credit, may reflect variety of things including the obvious inflation and real cost of borrowing. Aggregate factors such as economy wide loan recovery rates would certainly be such a factor.

A recent paper by Sujata Visaria finds that this infact is the case in India. She tries to assess the impact of the recent debt recovery tribunals introduced by the Indian government on loan recovery rates. She finds that not only the tribunals reduced delinquency rates by a substantial percentage but also reduced the interest rates on larger loans, holding the quality of borrowers constant. Thus, an improvement in economy wide loan recovery rates also reduces the overall cost of credit.

Ref:

Visaria Sujata (2009),  Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India, American Economic Journal: Applied Economics, 1(3), 59-81.

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