This paper highlights how stronger creditor rights improve allocative efficiency of credit and capital in the economy. Exploiting a collateral reform in India that strengthened creditor rights, I show that lenders cut credit to riskier borrowers. This is partly driven by a reduction in credit to otherwise insolvent borrowers (zombies). Importantly, credit access improved for non-zombie firms in industries that became decongested due to reductions in credit to zombie firms. As a result, non-zombie firms increased investment. Aggregate productivity of capital improved due to within-firm improvements and reallocation of capital to more productive firms, as well as due to their positive spillovers through the input-output linkages of the decongested industries.