Household sectoral choice and effective demand for rural credit in India

An analysis of the ICRISAT data from three Indian villages raises concern about the extent of rationing mechanism inhibiting the spread of formal credit in rural India where a significant proportion of households do not have any outstanding loan or borrow from the informal sector only. A limited-dependent econometric analysis of the factors jointly determining household sectoral choice and effective demand for informal loan conditional on whether a formal loan is available suggests that compared to formal loan easy and adequate access and prompt recovery are significant determinants of the popularity and viability of informal rural credit among sample households; also some households substitute labour income to ease the extent of credit. Thus, rationing of the formal credit is not the only factor inhibiting the spread of formal credit in the study villages.