Demand, segmentation and rationing in the rural credit markets

This thesis consists of five chapters.Chapter 1 and 2 The first chapter presents the introduction and the summary and the second chapter provides details on the survey and the data collection.┬áChapter 3 The demand and supply of credit in the rural finance markets are investigated in this paper using data on 989 households, in Orissa, India. The aim is to study the effects of household, farm productive characteristics and the policy variables on the demand and supply of credit. A type 3 Tobit model is estimated which corrects for sample selection and endogeniety bias. In addition, a generalised Double Hurdle model is estimated where the household’s access to credit is treated distinctly from decisions about the interest rate charged. The results from the type 3 tobit model suggest that the size of the operational holdings, net-wealth, the dependency ratio, educational level of the household and the wages and output prices are important determinants of the demand and supply of credit. The Double Hurdle model suggests the important result that the size of land owned plays a crucial role in whether the household obtains a loan or not.

Chapter 4 Based on the ‘Rural Credit Market Survey of the Puri district in India’, this paper investigates evidence on segmentation in the rural credit markets of Puri district. It further investigates the presence of any systematic association between the type of collateral offered by the household and the rate of interest at which it borrows. The data shows differences in the loan characteristics between the households borrowing from the formal and the informal sector. The empirical results confirm the presence of segmentation in the Puri credit market. For the households borrowing from the informal sector and the moneylenders, evidence also shows that the marketability of the collateral is inversely related to the interest rate. However, no such clear relationship is found for households borrowing from the formal sector.
Chapter 5 In the theoretical and the empirical literature on rural credit markets it is widely assumed that the households are credit rationed in the formal sector, which offers subsidised credit. This view rests on the assumptions that all households have a positive demand for formal credit and that it is the cheaper source of credit. Three different models of formal credit rationing are estimated in this paper. The first model is a conventional credit-rationing model. The second model assumes that the probability to borrow from the formal sector is jointly determined by the demand for credit and the decision of the bank on access. Finally, the third model relaxes both these assumptions and the household chooses between borrowing from the formal or the informal sector. The results confirm that the access to the formal sector in the Puri rural credit markets is limited and that there exists a high demand for credit. This suggests a high degree of effective credit rationing by the formal sector in Puri.

Author: Bali Swain, Ranjula

Source: Uppsala University Library

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Demand, segmentation and rationing in the rural credit markets