Explaining Access to Credit by Rural Households: Results based on a Study of Several States in India

Against the backdrop of evolution of rural credit system in India as well as its observed failure to be inclusive in character, this paper makes use of a fairly large data set of the Center for Management in Agriculture in Indian Institute of Management, Ahmedabad to try to explain several hitherto unaddressed issues – why certain rural households fail to have any access to credit from any source, and especially from the much-publicized and much- pampered formal source, and even from the emerging MFIs. Three probit models are used to explain this phenomenon in terms of village and household characteristics of the sample households. The paper highlights the need for strengthening rural infrastructure, which is often found to stand in complementary relation with credit demand and credit access. Emphasis is also laid on strengthening of semi-formal sources of credit known as micro-finance, which seem to follow a market logic rather than strict regulatory approach of formal banking system, and doesn’t always favor large borrowers and large projects, in-spite of apparent economies of scale of such projects. Familiarity to powerful rural personnel seem to be playing a dubious role in influencing credit demand and credit access – a matter which needs to be addressed revamping of development policy administration in the countryside.