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Relationship between money lenders and farmers: Theoretical perspective and evidence from potato farmers of West Bengal, India

Author

Listed:
  • Rakhe P. Balachandran
  • Sarat Chandra Dhal

Abstract

Purpose - The dependence of farmers on money lenders for agricultural credit despite the penetration of the formal financial sector with subsidized interest rates remains an economic puzzle. The purpose of this paper is to revisit the relationship between money lenders and farmers in the presence of trade-loan nexus. Design/methodology/approach - The study provides a theoretical framework supported by empirical evidence. It uses primary survey data of farmers in a major potato producing district of West Bengal, India. For the empirical analysis, apart from descriptive statistics, the authors use a logit regression model to derive insights from some testable hypotheses. Findings - The study finds that trade-loan nexus increases defaults on agricultural loans through two channels: first, by increasing loan requirement and repayment obligations through high input prices and interest rates, respectively; and second, by reducing income of farmers by setting low prices for the output. Research limitations/implications - The functioning of money lenders in rural areas, including their sources of finance and political control over local economy, and the existing social hierarchies in the rural context will have to be studied in detail to understand the complexities of the issue. Practical implications - The findings of the study underline the need for policy initiatives to break the trade-loan nexus to reduce the dependence of farmers on money lenders. Social implications - The higher defaults help the money lender to sustain in the rural agricultural loan market as the formal sector becomes reluctant to lend in the presence of pervasive defaults. Originality/value - The study is entirely original based on primary survey data of seven blocks of a major potato producing district in West Bengal, India. It could be the first such study on the subject. The findings are fresh and expected to contribute to development economics and agriculture finance literature and policy making.

Suggested Citation

  • Rakhe P. Balachandran & Sarat Chandra Dhal, 2018. "Relationship between money lenders and farmers: Theoretical perspective and evidence from potato farmers of West Bengal, India," Agricultural Finance Review, Emerald Group Publishing, vol. 78(3), pages 330-347, June.
  • Handle: RePEc:eme:afrpps:afr-07-2016-0066
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    More about this item

    Keywords

    Logit model; Agricultural finance; Informal finance; Institutional finance; Money lenders; Rural credit; O1; O17; O18; O57; Q1; Q14; C10; C21;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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