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Modeling Loan Repayment Behavior in Developing Countries

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  • Manojit Bhattacharjee
  • Meenakshi Rajeev

Abstract

Effective control of non-performing assets (NPAs) is critical for sustainable and healthy growth in the banking sector of any economy. In this paper we attempt to establish a possible connection between the problems of loan non-repayment in the formal credit market and credit accessibility from informal sources in India. The latter appears to flourish in many developing countries despite various government-initiated formal lending programs. Scholars often examine how poorer households become the victim of usurious interest rates charged by informal lenders and thereby lose their valuable securities. Our approach, however, suggests that the more unfavorable the terms of loan from an informal moneylender compared with a formal lending agency, the better are the chances of a borrower making a timely repayment, and thus obtaining the benefits of a formal loan on a recurring basis (which is not available in the case of default). The paper uses the National Sample Survey Organization database (59-super-th round, All India Debt and Investment Survey) to empirically examine the impact of interest rate in the informal sector on formal sector repayment. In addition to revealing a positive and significant impact of the informal sector's interest rate on the repayment of formal loans, the empirical analysis reveals a plausible negative impact of expectation regarding a loan waiver, as well as the moral hazard problem faced by formal lending agencies. Copyright 2013, Oxford University Press.

Suggested Citation

  • Manojit Bhattacharjee & Meenakshi Rajeev, 2013. "Modeling Loan Repayment Behavior in Developing Countries," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 35(2), pages 270-295.
  • Handle: RePEc:oup:apecpp:v:35:y:2013:i:2:p:270-295
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    File URL: http://hdl.handle.net/10.1093/aepp/ppt009
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    Cited by:

    1. Askar Choudhury & James Jones & Michael Opare-Addo, 2022. "Perceived Risk and Willingness to Provide Loan to Smallholder Farmers in Ghana," Journal of African Business, Taylor & Francis Journals, vol. 23(1), pages 23-40, January.
    2. Moumita Poddar & Tanmoyee Banerjee (Chatterjee) & Ajitava Raychaudhuri, 2019. "An economic analysis of the determinants of pattern of institutional borrowing in India," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 21(1), pages 54-92, June.
    3. Meenakshi Rajeev & Christoph Scherrer, 2021. "Smallholders’ Challenges: Realizing Peri-Urban Opportunities in Bengaluru," Sustainability, MDPI, vol. 13(18), pages 1-18, September.

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