Interest Rates for Rural Credit: A Study of Some Selected Villages in West Bengal

The rate of interest occupies a central place of discussion in the economic literature on rural credit. In the institutional credit market, the issue that raises controversy among the researchers is whether interest rate charged on institutional loan would be administered or market driven. In the non-institutional credit markets, the issues that have been subject to considerable debate are that of inter-household variations in interest rates as well as the determinants of interest rates for the non-institutional loans. Using primary data collected from 400 randomly selected households of Burdwan and Birbhum districts of West Bengal, this paper examines the effect of changes in actual interest rate on the demand for institutional loan, the extent of variation in rates of interest on the non-institutional loans among different categories of households and the main determinants of rate of interest for the non-institutional loans in rural West Bengal. The results conclude that the demand for crop loan is interest-elastic in the study areas. Thus, any increase in the actual rate of interest charged by the institutional credit agencies would lead to decline in agricultural credit for cropping purpose. The results support the view that there are wide variations in the interest rates charged on the non-institutional loans in rural areas. Finally, the regression results exhibit that the rate of interest paid on a non-institutional loan is significantly higher for the households belonging to an inferior socio-economic category than the loans obtained from the village moneylenders and collateral offered being less marketable. Further, the interest rate on the non-institutional loan is significantly lower in the agriculturally advanced areas as compared to the backward areas.