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Household Choice of Financial Borrowing and Its Source: Multinomial Probit Model with Selection

Author

Listed:
  • Kanika Rana

    (Corresponding Author, Consultant, Ernst and Young, Gurgaon)

  • Brinda Viswanathan

    (Professor, Madras School of Economics)

Abstract

In developing countries, the economically disempowered, borrow from multiple sources and also have multiple borrowings notwithstanding that some may be unable to access any form of credit. To ensure a greater amount of financial inclusion, it becomes necessary to understand what determines the choice between alternative loan source combinations while taking into account that borrowers may have distinct characteristics from non-borrowers. Access to formal credit sources, are elusive for the disadvantaged due to different demand and supply side perceptions. Microfinance institutions (MFI) play an intermediate role having some attributes of the informal network and some similar to formal institutions. This study uses an observational data set for 2011-12 to analyse the role of socio-economic-demographic characteristics in the household’s choice for different types of loan sources. In particular, the extensive nature of data allows us to study the mediating role played by MFI through its linkages with formal and informal sources. The results of Multinomial Probit with Heckman selection, to account for non-borrowing households, reveal that where institutional sources are still a preferred option for the relatively advantaged section of the population, presence of microfinance loans in combination with other loan sources has contributed in ensuring greater equity in credit access to all. However, women headed households or dalit households with lesser opportunities of networking are less likely to take credit from formal sources

Suggested Citation

  • Kanika Rana & Brinda Viswanathan, 2019. "Household Choice of Financial Borrowing and Its Source: Multinomial Probit Model with Selection," Working Papers 2019-181, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2019-181
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    References listed on IDEAS

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    1. Sandeep Kandikuppa & Clark Gray, 2022. "Climate change and household debt in rural India," Climatic Change, Springer, vol. 173(3), pages 1-27, August.

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    More about this item

    Keywords

    Household credit and sources; formal and informal institution; microfinance institutions; multinomial probit; Heckman selection;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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