Credit Constraints and Distress Sales in Rural India: An Econometric Analysis
Abstract The literature on rural credit market has generally assumed that farm households are rationed in their access to subsidised formal credit. Due to lack of infrastructure and poor access to institutional credit, exploitation of farmers in interlocked credit market is expected to be high. The distress amount in product selling is more likely to be influenced by the bargaining capacity of the farmer borrower. Underfinance, intensity of the additional liquidity to meet the cost of production and household consumption, and the monopsony nature of paddy market also force the farmers to get into interlocked credit market. This further leads to distress sale of paddy. The empirical analysis from Kalahandi district of Orissa, India shows that the access to formal credit is limited in rural areas although there exist a high demand for it. This suggests a high degree of credit rationing by the formal lender in Kalahandi. The study also suggests that minimisation of underfinance for crop loan and proper implementation of regulated price by the government can be helpful to reduce the distress sale. JEL Classification:
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