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Screening and Monitoring in Informal Credit Markets: Evidence from Rural Punjab

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  • Indervir Singh

Abstract

The present article examines the screening and monitoring strategies used by lenders to solve the problem of imperfect information in the rural informal credit market. The study uses data from a primary survey conducted in Punjab, India. The survey focuses on informal lending between commission agents and farmers. Data were collected from 120 randomly selected commission agents from four blocks. Each of the blocks represents a different development level. The results show that commission agents invested significant time and resources for screening and monitoring the farmers. The screening and monitoring were found to be more stringent in areas that were underdeveloped and had higher default risk. Commission agents could shift a significant share of the screening cost to the borrowers, thereby increasing their self-enforcement range. The study argues that high screening cost hurts small farmers. The regression results found a significant reduction in the default rate and the unrecovered loan due to screening strategies. JEL Classification: D81, E26, Q14

Suggested Citation

  • Indervir Singh, 2022. "Screening and Monitoring in Informal Credit Markets: Evidence from Rural Punjab," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 23(2), pages 228-251, September.
    • Handle: RePEc:sae:soueco:v:23:y:2022:i:2:p:228-251
    DOI: 10.1177/13915614221107844
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    More about this item

    Keywords

    Adverse selection; farm credit; imperfect information; informal credit markets; monitoring; moral hazard; screening;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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