DISCUSSION PAPER

Report No.: ARUY 45

Credit NMarkets in Rural South India: Theoretical Issues

and Empirical Analysis

by

Hans Binswanger, Balarainaiah, V. Bashkar Rao, M.J. Bhende

and KeV. Kashirsagar

Research UnitAgriculture and Rural Development Department

Operational Policy StaffWorld Bank

July 1985

The v±ews presented here are those of the author(s), and they should notbe interpreted as reflecting those of the World Bank.

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The authors are Mr. Hans Binswanger, who is a staff member of the'World Bank and Messrs. Balaramaiah, V. Bashkar Rao, M.J. Bhende andK.V. Kashirsagar are staff of the International Crops Research Institute forthe Semi-Arid Tropi^.s (ICRISAT), Hyderabad, India. The World Bank does notaccept responsibility for the views expressed herein which are those of theauthors and should not be attributed to the World Bank or to its affiliatedorganizations. The findings, interpretations, and conclusions are the resultsof research supported in part by the Bank; they do not necessarily representofficial policy of the Bank. The designations employed and the presentationof material in this document are solely for the convenience of the readerand do not imply the expression of any opinion whatsoever on the part of theWorld Bank or its affiliates concerning the legal status of any country,territory, area or of its authorities, or concerning the delimitation of itsboundaries, or national affiliation.

T. '~xvrxr,'xe-- 1m -- w

Credit Markets in Rural South India: Theoretical issues and Empirical

Analysis

by

Hans Binswanger, Balaramaiah, V. Bashkar Rao, M.J. Bhende

and K.V. Kashirsagar

Until recently the empirical literature on rural credit has focussed

primarily on analyzing the performance of formal credit agencies such as

cooperatives and banks. Von Pischke et. al. is a good sample of this

literature. Much emphasis has been placed on analyzing whether these

organization met their stated objectives such as disbursing credit to small

farmers, and on how they performed as financial institutions. The focus has

been on how to better achieve stated objectives, or on how to improve the

financial performance of the institutions, and proposed remedies typically

include better management techniques or interest rate policies.

There are several major gaps in this literature. The first is the

lack of a theoretical framework which would relate the peculiar management

difficulty in rural credit markets to the characteristics of agriculture such

as its spatial dispersion, seasonality and special risk characteristics, and

how the difficulties are over come in the process of economic development.

Such a theoretical framework would be helpful in suggesting what types of

financial intermediaries would be most appropriate for different regions and

at different stages of development and how government policy can support the

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emergence of the appropriate institutions.

The second gap is the paucity of empirical studies of borrower and

lender behavior in the informal credit markets. The All India Rural Debt and

Investment survey describe the size of this market, the types of lenders and

the interest rates charged. They also document the gradual replacement of the

informal system by formal lenders over time. But the survey data hide

important details such as what types of customers use what types of loans and

why. They also do not describe what happens to the informal market when the

formal market develops.

This paper is an attempt to partially fill some of these gaps. In

part I we present a theoretical framework to analyze rural credit and

insurance markets. This framework was developed by Binswanger and Rosenzweig,

(forthcoming) and is further elaborated here. In part II we present a case

study of credit markets in six-villages. We use the case study for four

objectives. The first is to test some of the hypotheses generated by the

theoretical framework for consistency with the observed credit markets in

these villages. This will be done in parts 2.1 and 2.3 but part two is not

organized according to these hypotheses. The second objective is to describe

a nearly pure money lender system as it still exists in Andhra Pradesh.

(Section 21)0. The third is to describe what happened to the informal credit

market when the formal credit institutions emerged (Section 2.2). The fourth

objective is to quiantitatively describe the current status of both formal and

informal lending in these villages. Familiar topics from other studies will

be covered here such as the distribution of credit by source, purpose and farm

size groups, and the repayment performance in the formal credit market. But

we also present detailed analysis of the terms and conditions of credit in the

3-

informal credit market.

The theoretical framework tries to give a consistent explanation of

many well-known characteristics of credit markets in general and of rural

credit markets in particular. These include the requirement for collateral;

the prevalence of tied transaction of credit and labor; the long term nature

of many credit relationships; as the generally low debt-equity ratios found on

farms in developing economies; or the late emergence of financial

intermediation in rural areas compared to urban areas. But new insights

emerge: An explanation of why farmers attach a very high value to land

ownership; why there typically is a discrepancy between capitalized land

rental rates and sales prices of land; why land sales are typically

concentrated in distress years. The theoretical framework also shows why poor

people and perhaps even larger farmers are usually rationed in both the formal

and informal credit market, i.e. they cannot obtain more loans even if they

are willing to offer higher interest rates. (Stiglitz and Weiss).

The key elements of the framework are:

1. The systematic introduction of risk and information costs into the

calculations of both borrowers and lenders, and the consequent emergence

of moral hazard.

2. The introduction of material features of agricultural production such its

spacial dispersion; the resulting covariance of yield risk; heterogeneity

of farmers and plots; high information gathering and transmission costs;

and the material attributes of its factors of production.

The theoretical framework discusses both credit and insurance markets

and shows that the difficulties of the key insurance market, that for crop

insurance, are explained by the same features of agriculture as that of the

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credit market. The absence of the crop insurance market is shown to have

consequences for the credit market.

PART 1 THEORETICAL FRAMEWORK

1.1 The General Consequences of Risk and Information Costs

The make the following six general assumptions:

Risk:

A-1o Individuals face risks from many different sources - from the

production process, from the market or from health factors.

Cost Information:

A-2. The acquisition and transmission of information involves costs

in term, of time and resources. Information is often acquired most cheaply as

a by-product of the production and consumption activities in which one is

engaged.

Behavioral:

A-3. Self Interest: Individuals are interested in their own

utility.

A-4. Individuals value consumption.

A-5. Individuals dislike effort.

A-6'. Individuals are risk averse whenever gains and losses exceed

trivial levels of income. Risk aversion may vary among individuals and for

the same individual with wealth.

These six assumptions have the following general consequences:

C-1. Asymmetric Information. Information has value and is costly to

acquire (A-1). Since individuals are selfish (A-3), they will not part with

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information they possess unless it is to their advantage. For example, high

quality workers will want employers to have accurate information about worker

quality while inferior ones would prefer that worker quality be unknown to the

employer (unless if the employer can penalize them once he finds out). The

same applies to borrowers and lenders or to insurors and insured. Sellers of

seeds and animals know more about their quality than do the buyers, and may

have incentives to misrepresent seed quality. Such problems of asymmetric

information arise in virtually all economic transactions to some extent.

C-2. Incentive Problems (Moral hazard, Adverse Selection, and

Screening Effects)

Whenever information is costly (A-2) and asymmetrically distributed

(C-1), incentive problems will arise in economic transactions. A daily paid

laborer has no incentive to work hard, unless supervised closely, either

through direct observation of his effort or inspection c,f his output. A

farmer whose crop is insured against all risks relative to a "normal'" level of

output will usually not apply as much care, precaution, or inputs as if his

crops were uninsured. It is in this insurance context that incentive problems

were first called moral hazard problems. Unless the insurance company can

stipulate input and/or care levels, and observe or monitor them at very low

cost, insurance contracts may lead to inefficient resource use.

When it is hard for one partner in a transaction to distinguish among

potentiaL partners of differing quality, screening problems arise. Insurors

call these adverse selection problems. Among a group of potential insurance

clients, those with a high exposure to risk will find insurance most

attractive. The insurance company will attempt to distinguish high-risk from

low-risk ones. If it cannot easily distinguish between them it will use more

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easily observed vari;ables such as age, sex, race, caste, etc. which are

perceived to be correlated with risk. If it cannot distinguish between

individuals at all, insurors will set the premiums so high that only high-risk

individuals find the insurance attractive and apply. The insurance market

then fails to exist for low-risk individuals. The presence of high-risk

individuals who cannot be identified imposes a cost on low-risk individuals

and forces the insurance company to use the terms of the contract to screen

individuals into homogenous groups.

Similar screening problems have been hypothesized in other markets.

E.g., Weiss 1980, Newbery and Stiglitz 1978. Stiglitz and Weiss 1980 explore

a screening model of the credit markets in which debtors reveal crucial

information through their choice of credit contracts. The most important

finding of the screening literature is the same as for insurance: The

presence of indistinguishable low-quality applicants imposes a cost on the

high-quality ones and/or may lead to the disappearance of the market.

C-3. Imperfect Enforcement of Property Rights

Where acquisition of information is costly (A-2) and asymmetrically

distributed (C-i), there is some positive incentive for theft.

C-4. Desirability of Insurance Contracts and Insurance Substitutes

This follows directly from Risk (A-1) and risk aversion (A-6). Most

individuals should be willing to pay some positive amounts to reduce their

exposure to the risks they face. Where insurance is unavailable they would be

willing -- at cost to themselves -- to alter their behavior in other ways to

reduce their exposure to risk.

C-5. Collateral Requirement

A collateral requirement affects borrowers' and lenders utility in

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complex ways. First we consider the case where a borrower has every intention

to pay back his loan. Default can then only be a consequence of bad luck and

is involuntary. Equation 1 shows that for a given interest rate i and loan

size L, raising the collateral value from zero to some positive amount raises

the expected return E to the lender from the loan

(1) E(L) = Li(l - ) + (C - L) X

In this equation, w denotes the probability of failure of the investment and C

is the value of the collateral to the lender. With zero collateral (C=O) the

expected return is equal to the rate of interest multiplied by the probability

of repayment (1 - 7), minus the value of the loan plus interest multiplied by

the probability of default (assuming that loans are either fully repaid or

fully defaulted on). l/ As collateral is added, the second term increases

progressively with only the difference between the collateral and the loan

amount being lost. Note that by raising the collateral value to levels larger

than the loan size plus interest, the expected return can be made larger than

the rate of interest, a technique which can be used to circumvent the impact

of interest rate ceilings.

1/ A more realistic repayment function is used by Virmani (1981), wherepartial repayment is made when the borrower's investment yields less thanthe principal plus interest. Full default would occur only when theproject outcome is so bad that partial repayme<nt becomes infeasible.However, a collateral requirement increases the lender's returns inVirmani's case as well. Conversely, risk-averse Lenders wi"l insist onsome collateral, even if they know the borrowers' intention to repay. Wethus see that collateral is a risk sharing device, and that the way inwhich agents view collateral requirements depends on their attitudestoward risk.

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Thus, from the point of view of expected return, interest and

collateral are substitutes. We will use our data to examine this first

hypothesis (H-1).

A collateral requirement between zero and the amount of the loan

shifts a portion of the potential capital loss from the lender to the

borrower. If the borrower is risk-neutral, he does not care whether

collateral is or is not required: the expected value of the capital loss which

he will bear in the bad-luck is offset by the lower expected interest costs in

the good-luck case.

Now consider a risk-averse borrower, The fact that the expected

value of the capital loss is just equal to the expected value of the interest

rate reduction in the good-outcome case is not sufficient to make him

indifferent to the imposition of a collateral requirement. The large

potential capital loss implies a high utility loss for the risk-averse

individual. He would therefore rather accept a high-interest contract which

allows him to default (involuntarily) in bad-luck cases at no additional cost

(H-2). With risk-neutral lenders there should not therefore be a collateral

requirement.

The most serious problem facing lenders, whether risk-neutral or

risk-averse, is that normally they cannot know a borrower's intentions about

paying back his loan. If there is no collateral requirement, utility-

maximizing borrowers will default if the utility of their current wealth (W)

less the loss of future earnings from default (D) exceeds the utility of

wealth when the loan amount plus interest is repaid. Formally the default

condition is

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U(W - D) > U(W - L(l + i)) (2a)

which simplifies to

D < L(l + i). (2b)

D is a function of the characteristics of the borrower. These personal

characteristics thus enter the loan market in an essential way.

The following testable hypotheses follow from equation 2: Other

things being equal, lenders are more likely to lend without collateral to

owners who have invested in land and buildings rather than to tenant farmers

(H-3), and to resident workers rather than to migrant workers (H-4). Lending

without collateral is also more likely for small loans rather than for large

ones (H-5).

Some institutions specialize in lending without collateral, or they

have specialized loan instruments which do not require collateral. In these

cases they either attempt to select customers whose characteristics indicate

that they have high repayment incentives, or they choose small loans compared

to the incomes of the borrowers (H-6).

For large loans, lenders can almost be certain that the utility cost

of default will exceed the value of the loans, and collateral will be used to

make up for the lack of incentive to repay. The default condition becomes

D + C < L(1 + i) (2c)

When the loss of future earnings opportunities plus collateral exceeds loan

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amount plus interest, all incentives to default are removed. Thus, when

lenders comp&cet, and when there are no interest rate ceilings, full collateral

for principal plus interest will only be demanded if the lender believes that

D, the loss of future earnings opportunities associated with default by the

lender, are negligible (H-7).

To summarize, at a given interest rate, collateral has three effects

or functions: it increases the expected return of the lender and reduces the

expected return for the borrower; it partly or fully shifts the risk of loss

of the principal from the lender to the borrower; and it provides those

borrowers who have a low disutility of default with an additional incentive to

repay their loans. We now apply these insights to the issue of capital

constraints for small and large farm owners.

C-6. Consequences of Collateral for Credit Markets

From our discussion of the collateral problem it is clear that small-

scale farmers who do not own land (or other assets acceptable as collateral)

will find it difficult to borrow to invest in fertilizer or other inputs.

Rather they will have to invest out of savings. Or they will have to

establish input-sharing arrangements with landowners. The credit market may

simply not exist for them. On the other hand, large-scale landowners will

obtain credit on favorable interest and collateral terns since the only reason

for collateral in their case would be to shift production risks away from the

lender (H-8). 2/ Small-scale landowners will be eligible for loans, but

lenders will usually insist on higher levels of collateral than for large-

scale owners to compensate for the higher risk of intentional default (but see

footnote 2 on poorly managed credit systems). This shifts a higher proportion

of the risk of capital loss to small-scale landlowners and increases the

expected cost of the loan as well. Thus small-scale owners will perceive

these loans as both more risky and more expensive than those extended to

large-scale farmers, and their utility cost of borrowing will be higher. They

may of course attempt to shift risk back to the lender by agreeing to higher

interest rates in exchange for a reduction in the collateral requirement.

However, the lender, even if risk-neutral, will only accept such a shift to

the extent that it leaves his expected return as large as that from loans to

large-scale landowners and as long as the collateral requirement provides

sufficient incentive for repayment. If the disutility cost of the loan is

sufficiently high, small-scale landowners may stop borrowing altogether. The

credit market for small-scale landowners may disappear because of a lack of

demand, despite the fact that they may still have available collateral in the

form of unencumbered land.

It is thus clear that identical loan terms do not imply identical

cost of credit for different borrowers. The loan market may disappear for

small-scale landowners from the demand side if the utility cost of loans

exceeds the utility benefits from their investment. The market may also

2/ Many government-subsidized rural credit schemes are poorly managed andallow large farmers to use their political power to press the governmentto accept default on their part. Such systems cannot survive in the longrun in the absence of continued government subsidies and are notconsidered here.

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disappear from the supply side for owners who do not own assets in forms

acceptable as collateral, or who already have high debt/equity ratios and have

"lused up" all this collateral.

C-7e Forms of Collateral: Not all forms of assets are suitable for

use as collateral. We define collateral as an asset which satisfies the

following three conditions - appropriability, absence of collateral-specific

risk, and accrual of the returns to the borrower during the loan period.

These conditions are listed by assets type in Table 1.

1. Appropriability: It must be easy for the lender to appropriate

the assets in case of default. As can be seen in Table 1, this condition can

be satisfied in several; ways: financial assets and gold can be deposited

with the lender. For land, real estate, motor vehicles, animals, slaves, and

human capital embodied in the borrower, ownership rights must be well-

defined. In the most formal systems titles exist which can be registered and

deposited. Furthermore, the state or customary rights have 'Cio enforce

lenders' rights by evicting the borrowers or assisting the lenders in

repossessing the mobile assets in case of default, other\wise the assets looses

its function as collateral (H-9). Where ownership rights are not in the form

of legal registered titles, other documentary evidence of the claim must be in

the lender's hand and/or social norms or customs must be sufficiently strong

to allow the lender similar assurance that he can appropriate the asset.

2. Absence of Collateral-Specific Risk: Lenders must be fairly

sure that the collateral cannot easily become worthless because of theft,

pretended theft (in which the borrower coLludes with the thief) or damage by

fire, accident, or in the case of animals, disease. Again, alternative ways

of mitigating or eliminating these problems exist, The assets can be

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Tabie 1

Collateral Conditions for Different Assets

Absence ofCollateral- Accruals of Overall EaseSpecial Return to Of Use As

Asset Appropriability Risk Borrower Collateral

Financial Assets Deposit with Yes Yes Highestand Gold Lender

Land With Title Reg- Yes Yes Very Highistration andEnforcement

Real Estate " Yes, with Yes HighFire Insur-ance

Motor Vehicles " Yes, with Theft, Yes HighAccidentInsurance

Animals to No, moral Yes lowHazard

Human Capital " Yes, with Yes LowAccident,Health Insur-ance

Producer and Deposit with Yes, with No For short-Consumer Lender Theft Insur- term pawnDurables, ance lendingIncludingJewelry

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deposited with a lender. Land, on the other hartd, entails little risk because

of its physical characteristics. For real estate, theft is not a problem and

it becomes a desirable collateral when it can be cheaply insured against fire

and other damages. Similarly, vehicles become attractive when they can be

cheaply insured against theft, and accidents, including those caused by the

owner himself. Indeed, where such insurance exists lenders routinely compel

borrowers to buy this insurance. For animals, health risks arise in

addition. Incentives problems make it extremely difficult to provide life

insurance (for health-related death causes) for animals because owners who are

relatively insensitive to the suffering experienced by animals might find it

profitable to let a sick animal die if fully insured, Thus health insurance

for animals is almost universally absent. In the case of people who buy their

own life insurance, this incentive problem does not exist because they care

about their own life,

3e Accrual of the Returns of the Asset to the Borrower: Most

assets, including those listed in Table 1, easily satisfy this condition,

However, producer and consumer durables including jewelry cannot be deposited

- as they must to satisfy condition 1 - without loss of use value to the

borrower. These pawns are thus of little utility as collateral except for

very short periods, or when the loss of use implies minimal production or

t;tility-loss, The last column of Table 1 summarizes the ease with whichi an

asset can be used or rather made useable as a collateral for longer-term

lending. We will examine it against the data (H-10). It is clear that

colLateral value is highly dependent on the legal and insurance environment

within which it is to be used, and developed countries have managed to convert

a wide variety of assets into collateral.

15 -

C-8. Collateral Substitutes and Long-Term Credit Relations: People

living in economies which have few good collateral options, or borrowers who

own few assets useable as collateral, either will not borrow much or resort to

inferior or more problematic forms of collateral in which the conditions set

out above are not easily met. They can also attempt to move to a variety of

collateral substitutes. One such substitute is third party guarantees: a

borrower who owns few assets with collateral value and whose own repayment

incentives appear to be low to the lender may ask a third party who is

perceived as less of a risk by the lender to guarantee repayment in case the

borrower defaults. The third party may do so if it has better information

about the borrowers repayment incentive/capacities, or otherwise gains from

the relationship with the borrower in other than the borrowing transaction.

A second substitute is the threat of loss of future borrowing

opportunities. For immobile populations, traditional money-lending systems

transmit default information quickly to all potential lenders (H-li) and

substantial lending can occur on this basis alone. Modern credit bureaus

provide the same service and are an important institution facilitating hire-

purchase transactions involving smaller consumer durables which can be used by

the borrower rather than be pa-wned. The third form of collateral substitute

is a tied contract in which credit is given in association with another

transaction.

Where a substantial arnount of lending occurs without collateral

(either because of implicitly recognized repayment incentives or based on

collateral substitutes), borrowers and lenders have an incentive to form Long-

term relationships (H-12), After the first successful loan this will save on

information and supervision costs. Concentrating most unsecured lending with

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a single lender further reduces information and moral hazard problems. Both

the lender and borrower will use or recognize the potential of ending the

relationship in the bargaining about the terms of the individual loans made

during the relationship.

C-9. The Valuation of Assets With Collateral Value When Insurance

Markets Are Poorly Developed

Because credit is a close substitute for desirable insurance (C-4),

and because assets with collateral value are often necessary for access to

credit (C-5), any asset with a high collateral value will be valued over and

above the utility of its consumption or production stream. Tte full value of

the asset will reflect the direct utility in production or consumption plus

the utility of the insurance (via credit access) it provides. Such valuation

will thus be reflected in the sales price of the asset, but not in its rental

price. This is because only the owner can use an asset as collateral, whether

or not he rents it out; the tenant cannot.

A comparison of commodity markets with the credit market concludes

this section. In commodity markets, a sales contract is concerned only with

the price, the quantity and the quality attributes of the goods. A credit

contract, in addition to price (interest) and quantity (loan size), regulates

collateral conditions and a repayment schedule, i.e., the fuLL cost of

borrowing depends on more than just the price. It is therefore futile to try

to estimate interest-elasticities of loan demands unless these other credit

terms are accounted for. Furtherrnore, in commodity transactions the seller is

not interested in the attributes or the buyer. But personal attributes,

wealth, the debt position of the borrower, and the borrower's projects play an

essential role for the lender in assessing the terms of credit. And the

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borrower is concerned with the characteristics of the lender as well: How

flexible will the lender be when the borrower is in temporary repayment

difficulties not of his own making? An impersonal credit market is therefore

not feasible, and credit markets cannot be analyzed with commodity market

analogies such as a Marshallian supply and demand diagran. Indeed, supply for

credit and demand for it are so closely interconnected that given full

information about the borrower and his projects, both borrower and lender may

come to identical assessment whether to demand and/or supply credit on a given

set of terms.

1.2 Spatial and Risk Characteristics of Agriculture and Their

Implications for Rural Insurance and Financial Intermediation

In addition to incorporating the consequences of risk and information

costs, we depart from earlier attempts to characterize rural credit markets by

the systematic incorporation of the major technological features of

agricultural production which together lead to the most striking differences

in organization compared to other sectors of the economy. The basic features

introduced are associated with the spatial nature of agriculture and the

peculiar transport, communication and risk configuration which results.

A-7. Spatial Dispersion: Land is an essential factor of

production. Its complete immobility implies that cooperating factors have to

be brought to it in order for production to take place, inspection of crop

status for management credit or insurance decisions involves travel to the

plot.

A-8. Transport and Travel Costs Are High and time-intensive because

of the spatial dispersion of agriculture (A-7).

A-9. Seasonality: Because of the immobility of land (A-7), yearly

18

climatic variations of temperature, rainfall and sunshine leveLs lead to

seasonality of agriculture. These temporal variations give rise to seasonal

needs for credit to bridge the gaps between receipts and expenditures.

A-10.Synchronic Timing: Within small agricultural regions

seasonality (A-9) and the spatial dispersion (A-7) of agriculture lead to high

positive covariances in the timing of crop growth cycles and therefore of the

demand for credit and the supply of deposits.

A-11.The spatial characteristic of agriculture and the inherent

heterogeneity of factors of production entail high costs of information

acquisition and transmissior,. Costs of transmitting information fall with the

development of transport networks, printed media and telecommunications.

A-12 0Risk arises from four different causes or sources: The first

three, yield risk, market price risk and timing uncertainties, are heavily but

not exclusively associated with weather uncertainties. The fourth class of

risks are "breakdown" and life cycle risks: Durable factors of production may

fail: machines can break down temporarily, animals can fall sick or have

accidents, buildings can burn down. The timing of repair costs and

reinvestments is therefore uncertain. Individuals face risks of temporary or

permanent absence from work because of illness, accidents or other life cycle

risks.

A-13.Yield Risk Covariance: Because of the spatial characteristic

of weather conditions (A-7), parcels of land within a spatial unit which has

similar weather conditions will have covariate yields.

These spatial and risk characteristics have the following

implications for rural insurance and financial intermediation:

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C-1O.Absence of Crop Insurance:

Profit making enterprises provide insurance protection in rural areas

only for some of the breakdown and life cycle risks.

the provision of general crop yield insurance by private sector companies,

however, does not exist anywhere in the world except when subsidized heavily

by governments. 3/ Our assumptions imply that this is not because of a lack

of demand for such insurance (C-4). Farmers would be willing to pay some

premium for it. In another paper (Binswanger 1982) the supply side problems

have been attributed primarily to risk covariance, and to the extraordinary

difficulties of assessing expected yields and losses when plots of land are

heterogenous and widely dispersed. Covariance leads to high probability of

catastrophic losses for the insurance company, which therefore must carry very

high reserves. And high information costs, combined with asymmetric

information and moral hazard, leads to high operational costs and hence

insurance premiums which are so high that farmers are universally unwilling to

pay them (Hazell, Pomareda and Valdez 1985).

C-l1.Reserves and Credit as Insurance Substitutes

We have seen above that a crop insurance scheme for a small region

would not be very different from a reserve system. Reserves may be held in

the form of cash, gold, financial assets, consumer durables, stocks of food or

feed, and as durable factors of production (land, animals) which can be sold

in an emergency. Different kinds of assets differ in their value as

reserves. Gold has no positive return, but financial assets and producer

3/ Private companies, however, may provide insurance for very specific riskssuch as hail or storm damage.

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durables do. The latter however, suffer from substantial price variation

which reduces their value as reserves (H-13). Reserves could also be held as

deposits or personal loans given to others, whether as a money lender, or less

formally, to friends and relatives.

Access to credit provides an important substitute for insurance where

insurance is absent or costly. Credit can be a low-cost substitute for

insurance if borrowing rates in bad years or in emergencies are not much

higher than deposit rates or rates of return on financial assets (H-14).

The poor development of insurance in agriculture provides a rationale

for very conservative debt-equity ratios. These ratios should be more

conservative, the higher the riskiness of the agroclimate. Many small owners

may not want to tie up all their assets as collateral to secure production

loans. "Unused" collateral value of land acts as an insurance substitute to

ensure access to credit after bad events.

C-12.Fundamental Difficulties of Rural Financial Intermediation

Why do banks enter rural areas only at very late stage of

development? And why do money lenders not accept desposits but generally

operate by lending out of their own equity?, (H-15). There is no reason why

peasant agriculture cannot generate savings, that is deposits. Why is there

not sufficient demand for deposit services to make it attractive for money

lenders to offer such services?

Compared to bankers in an urban trading center who lend to a variety

of sectors of the economy, rural money lenders probably face fewer information

problems. Since they lend primarily to farmers with covariate yield risks (A-

13), they need knowledge of conditions in only one producing sector rather

than several (in addition to knowledge about the borrowers financial

- 21 -

condition and other characteristics).

There are two sets of reasons, however, which imply that a local

rural bank could only be an intermediary between borrowers and lenders if it

had a high reserve ratio: First are seasonality (A-9) and synchronic timing

(A-10): If depositors and lenders are both engaged in agricultural

production, the depositors will want to withdraw their funds for production

purposes at the beginning of the growinlg season, i.e., at the same time that

borrowers will want to borrow for production purposes as well. Deposits and

repayments would similarly coincide at the harvest time.

Second, for longer-term lending, covariance of yield risk (A-13)

leads to covariance of default risks. In addition, covariance among yields

leads ta covariance among incomes of depositors and borrowers. If crops fail

in one year, most depositors will find that they have low incomes and will

want to withdraw their deposits. But most borrowers will find it impossible

to repay loans. A money lender who lends out of equity does indeed have a

high level of "reserves" and can reschedule loan repayments while charging

interest on the outstanding balance; the expected return on such loans does

not decline because of yield covariance. If instead he lends out of

desposits, he may have to collect the funds via sale of the collateral, which

in bad crop years may be marketable only at a discount or with other

difficulties.

If farmers' yields were fully insured, covariance between depositors'

incomes and borrowers' default wo-ald be sharply reduced. But in the absence

of such insurance (C-10), the money lender cannot pay sufficiently high

interest to attract depositors because reserve requirements are too high.

- 22 -

Furthermore, if borrowers and depositors are both closely associated

with agriculture, the money lender does not bridge an important information

gap between them (Virmani 1981) and the depositor may be just as capable of

lending to the borrower directly, i.e., without intermediation. (Of course he

then also faces the costs of information, supervision, and collection.) This

direct lending opportunity limits the gap which can exist between the deposit

rate and the lending rate fairly sharply, placing a lower bound on the deposit

rate below which depositors disappear. This rate appears usually to be higher

than the deposit rate feasible with a high reserve requirement.

A financial intermediary must operate in variety of distinct

agroclimatic regions just like an insurance company. Or he must intermediate

between urban centers and rural areas, a service provided by many traders.

But this geographir dispersion leads to similar informational problems to

those of the insurance company. The bank must be able to assess yields in

order to make correct rescheduling decisions, and must evaluate the intentions

of borrowers.

The same circumstances which lead to an absence of intermediation

also make it impossible for farms to issue bonds or bondlike instruments in a

local bond market which could serve as an alternative to deposit banking (H-

15). Bonds would be very risky instruments, since in bad years both borrowers

and lenders would want to sell them, leading to large bond yield and price

fluctuations. A larger geographic market in bonds issued by farms would have

even higher information and incentive difficulties than a branch network.

Thus even the larger agricultural economy is not capable of generating fixed

interest bearing securities from within, since yields and prices are highly

correlated with agricultural production conditions. In order for fixed

- 23 -

interest securities to become available in rural areas, they have to be

created by borrowers outside of the agricultural system and be marketed in

rural areas.

C-13.Credit and the Land Sale Market

Two features of agriculture - the high positive spatial covariation

of income (A-13) and the collateral value of land (C-7) - imply that in

periods of normal weather conditions there would be few land sales (H-17). On

the supply side, sellers of land would only be better off if they could earn a

higher return from the proceeds of the land sale than from self cultivation or

land rental. The supply of land for sale will thus be small where non-

agricultural investment opportunities for rural residents are limited and

national credit markets are undeveloped. In many instances, the only

alternative investment would be money lending, which would not allow the

potential seller to escape the risks associated with agriculture and would

entail the supervision of debtors rather than workers or tenants..

On the demand side, the number of bidders for land will be

constrained by the level of self-generated savings, since the mortgaging of

land to purchase land would be unprofitable (H-18). Consider a landless

laborer who wishes to purchase land by obtaining a loan and using the land

purchased with the loan as collateral. Because (unpledged) land has

collateral value (lowers net credit costs), the equilibrium price of land will

always exceed the present discounted value of the income stream produced from

the land, for given credit costs (C-9). The owner of mortgaged land, however,

cannot use the land as collateral for working capital, does not reap the

production credit advantage, and thus will be unable to repay the loan for the

land purchase out of his increased income stream. Only land not already

- 24 -

pledged as collateral yields a flow of income whose present vatue equals the

land price. Land sales thus are likely to be financed out of self-generated

funds, from savings, so that the purchased land can be used as collateral for

working capital. The necessity of purchasing land out of savings might thus

tend to make any given distribution of landholdings more unequal, despite the

greater utility value of land (insurance value, collateral, lower labor costs)

to smaller owners.

The covariation in yields suggests that in particularly good crop

years, when savings are high, there would be few sellers of land and many

potential buyers at the "normal" price; good years are thus not good times for

larid purchases. In bad years, there would be little savings to finance land

purchases; indeed, in particularly bad periods of weather - consecutive

harvest failures, for example - money lenders would be the only individuals

with assets (their debt claims). Money lenders would prefer to take over

rather than to sell the landholdings offered as collateral by defaulters,

since the price of land would be lower than average in bad years. Thus, in

bad crop years distress sales to money lenders (or transfers of land at values

set at the time of taking the loan) would be the most prevalent transaction

(H-19).

In sum, we would expect that in areas with poorly developed capital

markets, land sales would be few and limited mainly to distress sales. There

would be a tenderncy for land to accumulate in the hands of persons with

greater production endowments - managerial skills, family labor, bullocks -

but this also means that land would tend to accumulate faster among persons

with already high land ownership.

- 25 -

C-14.Agriculture-Specific Collateral Substitutes

Under C-8 third party guarantees and loss of future borrowing

opportunities were already discussed as they are not agriculture-specific.

The specially dispersed nature of production (A-#), the synchronic occurrence

of loan demands at the beginning and during the crop season, and the

sjnchronic nature of harvest and crop supply (A-10) encourages the linking of

credit and output transactions. Traders may lend in return for a promise that

output will be sold to them rather than to other traders. If they provide

credit for inputs they may link credit to input sales. Continued observation

of input purchases, crop stages and output sales enables the trader to

accumulate information about the borrower cheaply. The provision of credit

provides a competitive edge to wealthier traders and strengthens local

oligopolistic power of a few.

Since loans are often used to cover subsistence, borrowers are not

adverse to taking them in the form of food. Lenders can observe the fields of

borrowers and tie repayment in kind to harvesting. As they anticipate loan

demand in the form of foodgrains in the next season, they save on marketing

costs by conducting borrowing and lending in kind. Because of spatial

dispersion these savings in transport and marketing can be considerable.

As is well recognized in the tenancy literature (Jaynes, Braverman

and Srinivasan, Binswanger and Rosenzweig), sharecropping contracts may be

structured to provide a credit function: The landlord may provide inputs

which a collateral-poor tenant could not buy by borrowing from someone else.

The landlord may also advance the wages fund. As the landlord has to

supervise the tenant and collect his share, incentives and moral hazard

problems (C-2) are reduced relative to tenancy and loan transactions with

- 26

separate parties.

Similar reduction in incentives and moral hazard problems occur when

credit and labor contracts are linked: If the labor contract is long term

and/or repeated, the employer can observe the workers characteristics prior to

lending and/or deduct repayments from wages. Both landlords and employers may

save on marketing costs by advancing loans in kind. In environments where

land markets are highly illiquid, land owners who are poor or in temporary

difficulty may prefer to rent out land in return for advance payment of the

rent rather than selling land or mortgaging it.

The linked transactions discussed above have been described and

documented in a number of environments (for review and examples see Binswanger

and Rosenzweig, 1984). They vary a great deal in importance from location to

location. Our data does not include sufficient geographic coverage to test

hypotheses about what causes variations in such interlinking arrangements.

Instead, the main hypothesis we will explore is that these interlinking

arrangements are collateral substitutes and should not be used by collateral-

rich borrowers who can borrow on the basis of explicit collateral or

implicitly recognized repayment incentives associated with their ownership of

land (H-20). We have already stated the hypothesis that borrowing based on

collateral substitutes will be associated with long term relationships between

lender and borrower.

C-15.Problems of Rural Branch Banking

In order to overcome covariance problems, a rural bank must operate

in distinct agro-climatic environments. Because the intentions of borrowers

and the insured cannot be known with certainty, banks face the problems of

assessing the nature and extent of disasters which strike their clients.

- 27 -

Banks must know the nature of the disasters in order to make decisions on

whether or not to reschedule debts. Furthermore, in order to assess the

credit-worthiness of farm loans, banks need information about the returns from

the different activities of the farmers they serve. Therefore a branch system

is required to achieve close contact between the branch manager and his

client. This immediately requires that a method exist by which the

performance of branches and of managers can be assessed. Furthermore,

managers never have Lull incentive to behave like the parent company since

their shares in company profits are usually quite small. Indeed they may

often have an incentive to collude with clients against the parent company, as

for example when their performance is assessed on the volume of credit

extended. In this case they have every incentive to extend credit to more

risky clients, and to accept bribes from farmers in return for approving

payments.

While these problems apply to any banking or insurance system, they

are particularly severe in agriculture. This is partly becaus;e of the

distance between head and branch offices, and the absence of cheap telephones

in developing countries. But also because of the covariance problem:

If crops fail for most clients, debts have to be rescheduled and

indemnities paid at the same time, so that branch or local office profits, and

other indicators used in evaluating branch performance will be small that

year. A profit maximizing strategy for the network implies that the system

must be able to accofmodate several bad years in a row in a single location.

Therefore, profit performance of individual branch offices may, on occasion,

have to be low for several years in a row even with an excellent manager,

Since there are no perfect ways to distinguish between bad (or colluding)

28

managers and bad years, central managers face great difficulties. In some

cases, these may be overcome be separating the authority of granting a loan

from the authority to reschedule. However, in a regionally dispersed

organization divorcing these decisions is costly, requiring more people to

travel extensively to acquire accurate information about clients.

The pooling of rural banking over a wide range of agro-climatic zones

should, in principle, come close to allowing a parent bank to act in a nearly

risk-neutral or profit-maximizing way- in writing individual contracts.

Nevertheless, problems local managers face in impressing the head office with

their annual performance, together with high yield covariance in their areas,

are likely to induce risk-averse behavior on the part of each manager with

respect to individual contracts. Managers will try to reduce the year-to-year

fluctuations in their branch performance by choosing clients with low default

risks. Thus branch banking may never be able to overcome the covariance

problem fully by pooling across regions.

In order to overcome the incentive problems, a branch system requires

that local managers have a lot of local knowledged, a high share in the long

run profitability of the branch and perhaps have to share in long term

losses. Profit sharing is one alternative, equity participation by the branch

manager a second, the linking of promotion to long term branch profitability a

third. All these mechanisms, though, require long term posting of managers to

a particular branch. A variation of this is the linking of existing money

lenders to the urban banking system via credits to the money lenders for the

expressed purpose of on-lending. Money lenders then have a full incentive and

carry the major burden of risk associated with failure of their operation.

While this solves the incentive problems, the lack of interregional risk

- 29 -

sharing may induce excessively conservative behavior on the part of such local

banks.

It is also clear that any reduction in the cost of transmitting,

storing, and retrieving information to and within the head office will improve

the feasibility of regional branch systems.

From the above discussion several hypotheses follow. Other things

equal, it is easier to establish rural branch banking where yield risks are

lower and less covariate (H-21), where sowing and harvesting is less

synchronous across crops and farms (H-22), where double or triple cropping is

practiced (H-23), where transport and communications systems are well

developed (H-24) and distances between farms are small (H-25).

Because of lack of sufficient geographic variability, these five

hypotheses cannot be tested with the data from the six villages discussed

below. But they should be tested, because their confirmation would enable a

better targeting of rural financial development efforts to regions, or a

better selection of the timing when to introduce formal lending institutions

in a particular region.

Table 2 summarizes the hypotheses. For those which can be tested

with the data available it also indicates the page numbers where consistent or

inconsistent evidence can be found in part 2 of the paper, as part 2 is not

organized in the sequence of these hypotheses.

- 30 -

Table 2: Summary of Hypotheses Implied in Theoretical Framnework

All the hypotheses below are "ceteris paribus", i.e., holding environment, Empiricalpersonal characteristics and other loan terms constant. Evidence

H-1 Lenders use collateral as a rate of return substitute. 36, 37, 62, inconsistent

H-2 Borrowers are willing to pay higher interests for a loan without not testedcollateral requirement compared to a loan with one.

H-3 Landowners are more likely to be given loans wihtout collateral 38, 62, mixedthan non-owners

H-4 Migrant workers are less likely to be given loans without 39 consistentcollateral than resident workers.

H-5 Small loans are more likely to be given without collateral than 39 consistentlarge ones.

H-6 Lenders who lend without collateral attempt to select customers 38, 62 consistencwith high repayment incentives.

H-7 When loss of future earnings opportunities 38 consistentassociated with default is low, collateral or collateralsubstitutes will be insisted on.

H-8 Collateral-poor borrowers, such as nonowners of land can borrow 38 consistentsubstantial amounts only by employing collateral substitutes.

H-9 Lack of enforcement by the state or by the villaae community 37, 52 consistentmay render assets worchless as collateral and encourage thedevelopment of new collateral substitues

H-10 Assets are ordered in terms of their suitability as collateral 53 only preference foras given in Table 1. land emerges clearlv

H-11 Traditional lending systems have mechanisms to rapidly diffuse 35 consistentdefault information to potential lenders

H-12 Lending without collateral or based on substitutes is best done 35 consistentvia long-term and rather exclusive relationships

H-13 Consumer durables have low reserve and collateral value 54 consistent

H-14 Credit serves as a substitute for insurance 38, 55 consistent butnct terribly important

H-15 Rural moneylenders lend primarily out of equity, i.e., have 36, 41, consistentextremely high reserve ratios.

H-16 Rural areas do not generace financial assets. not noted but well known

H-17 Land sales are concentrated in distress years. Land is 41, 42, consistent whereusually the last asset sold. no alternative labor

opportunities exist

H-18 Land is usually purchased out of equity, not with funds not testedborrowed by mortgaging land.

H-19 In bad years most land sales are to moneylenders. 42 consistent

H-20 Collateral rich borrowers will not use collateral substitutes. 39 consistent

H--21 to H-26 It is easier to escablish rural branch banking where not testedyield risks are less covariate (21) where sowing and harvestingare less synchronous across crops and farms (22), where doubleor triple cropping is pracciced (23), where transport and creditsystems are well developed (24) and where distances between farmsare small (25).

- 31 -

PART 2G THE CREDIT MARKET IN SIX SOUTH INDIAN VILLAGES

The following are ICRISAT's study villages in South India: Aurepalle

and Dokur in Mahboobnagar District of Andhra Pradesh, Shirapur and Kalman in

Sholapur District of Maharashtra, and Kanzara and Kinkheda in Akola district

of Maharashtra. The three districts represent distinct climatological,

agronomic, and socio-economic zones of the Semi-Arid Topics (SAT) of India.

Under the lCRISAT village level studies data have been, and continue

to be collected from a randomly selected panel of 240 households at intervals

of 20 to 40 days since May 1975. The panels in each village consist of 30

farm households and 10 labor households (which include land operators with

less than 0.2 ha of operated area). Data have been collected on a broad

spectrum of socioeconomic and agrobiological aspects. The data collection,

has been done by resident investigators (some of whom as co-authors) who had a

rural background, training in agricultural economics, and belonged to the same

linguistic group as the farmers.

The agroclimatic characteristics of the regions and the villages are

summarized in table 3. Mahboobnagar is a region of medium to shallow Alfisols

(red soil with relatively high aluminum and ferric content) with an average

medium to low annual rainfall of 710 mm which is fairly erratic. Although

dry, the district has supported for a long time a considerable amount of rice

cultivation, based on irrigation from numerous runoff collection reservoirs,

or tanks, and from wells. Tank bulding, as a means to assure a water supply

for rice cultivation, has been for centuries an important activity of kings

and other rulers in the upland, semi-arid granitic areas of what are now

western Andhra Pradesh and western Tamil Nadu.

Table 3:

Details of the Villages Covered in ICRISAT's Village Level Studies a/

Annual Distance from (in km)Village District State Average Coefficient Soil Type Irrigation b/ Primary Cooperative Commercial Lard Devl.

(mm) of Variation d/ (%) Credit Co-op Bank Bank Bank

Kanzara Akola Maharashtra 820 26 Medium-deep 4.9 in village since 8 8 8Vertisols 1950s

Kinkheda Akola Maharashtra 820 n.a. Medium-deep 3.8 in village since 14 14 14Vertisoils 1950's

Kalman Sholapur Maharashtra 690 36 Deep and medium 10.4 in village since 12 12 12deep Vertisoils 1954

Shirapur Sholapur Maharashtra 690 n.a. Deep Vertisoils 13.3 in village since in village 12 331954

Aurepalle Mahboobnagar A.P. 710 36 Shallow and 21.0 Liquidated society at 26 31medium-deep 4 km, Bank

at 26

Dokur Nahboobnagar A.P. 710 n.a. Shallow and 60.1 not operative society at 4 25medium-deep 4 km, BankAlfisols at 25 km

a/ ICRISAT has been conducting studies in these six villages since May 1975 (Jodha et al. 1977).

b/ Gross irrigated areas as proportion of gross cropped area (average 3 years)

c/ On the basis of operational land holding

d/ Coefficient of variation of household income per person 1975-76 to 1979-80.

r 1

- 33 -

Sholapur has a mixture of deep Vertisols (black cotton soils) with

very high moisture retention capacity and an annual average rainfall of

690 mm. While the amount is similar to Mahboobnagar, the rainfall is much

more erratic there, especially within each year (not reflected on CV of annual

rainfall), so that Sholapur is agriculturally the least prosperous zone of the

three.

Other features of the selected villa-es and households are discussed

in Johda et al. (1977) or Binswanger et al. (1977). Here we note that

Mahboobnagar and Sholapur are high risk areas either on account of their

shallow soils (Mahboobnagar) or very unreliable rainfall (Sholapur). Akola,

on the other hand, is an assured rainfall zone where farmers face much lower

yield risks. Credit and banking services are most easily available in Akola

and least developed in Mahboobnagar.

While credit data were collected from the inception of the study a

very detailed data set on terms conditions and partners of credit transactions

was only collected in 1979/80 by several of the co-authors of this study. The

quantitative information was supplemented by the authors' personal

observations and field notes.

2.1 The Traditional Money Lending System

A well developed traditional money lending system still exists in the

villages of Mahboobnagar District (Aurepalle and Dokur) where commercial banks

and cooperatives have made little headway. Information to describe this

system comes from the sample of borrowing households and from interviews with

five moneylenders in Aurepalle village. In the Sholapur and Akola villages

older informers, including former professional moneylenders, provided us wifth

i.nformation about the traditional system when it still was in existence prior

- 34 -

to the introduction of cooperative credit societies in the 1950's.

In the absence of formal credit sources a village would typically

have had 1 to 5 major moneylenders, each perhaps with 15 up to a maximum of 50

clients. A rough estimate indicates that the largest moneylenders of

Aurepalle has a total portfolio outstanding of about Rs. 100,000. These

m-)neylenders could completely specialize in moneylending, renting out whatever

land they owned, or they could be farmers or traders at the same time,

Most farmers would be associated in a long term relationship with a

single moneylender extending over several years up to decades. In Aurepalli

the average length of relationship with the same moneylender is 9.5 years for

a sample of 19 households for which information is available, with the longest

relationship having lasted for 40 years. (consistent with H-12). The lenders

provide for most large loans taken by the farmers. However, farmers could

obtain smaller loans from more than one lender. Switching one's moneylender

is not common but feasible. It does require repayment of all one's debts to

the frXist moneylender.

Clients would attempt to achieve a high level of secrecy about their

borrowings, as would the moneylenders. Only under repayment difficulties

would details about a client's borrowing be made public. On the othe hand

moneylenders in Aurepalli do exchange information about clients. In

particular they know who each others clients are.

Unlike formal sector lending institutions, moneylenders would lend

for both production and consumption purposes. Moreover, the borrowing terms

do not differ for the same client between loans for production and

consumption. That does not mean that moneylenders are not concerned about the

"project" to be financed by the borrower. Indeed they ask the borrower what

- 35 -

the purpose of each loan is and write it down. Both moneylenders and their

clients maintain that the stated purpose is indeed the actual purpose of

borrowing. Moneylenders ask these questions in order to gain information

about a borrower's overall financial position and financial behavior. Both

clients and moneylenders have reputations as good or bad clients

(moneylenders). Disclosure of financial difficulty of a client is a major

threat to his reputation. In most villages, village elders will assist

recovery by mediating between borrowers and lenders in public meetings

(consistent with H-11). The threat to ask for such a meeting is definitely

used to speed up recovery.

A moneylender would usually attempt to fulfill the financial

requirements of his clients in good standing out of his own funds. They would

not borrow money from other moneylenders to do so if they were short of

funds. Instead, in some cases they could refer one of their clients to

another moneylender. Moneylenders also rarely use funds borrowerd from other

sources, such as deposits from clients. On occasion a moneylender may lend

out money belonging to close relatives. In Aurepalli each of 3 brothers is a

moneylender and uses only his own funds. In one village (Shirapur) one or the

moneylenders may have onlent funds given to him for safekeeping. Lending by

moneylenders to traders exists but is rather rare, and so is the reverse.

Thus our hypothesis 15 - absence of financial intermediation - is confirmed.

Moneylenders, traders and other wealthy villagers have ample direct lending

opportunities, and this seems to sharply limit financial intermediation.

Classes of Loans

1. Medium term loans are given to better-off clients with an expectation

that repayment will occur within one to three years. But a precise repayment

- 36 -

schedule is often not fixed in advance. Repayment could easily extend to up

to 5 years, if poor agricultural years followed. However, moneylenders never

gave true long term loans in any of the villages.

Loan amounts could be considerable, especially for marriage loans

where amounts up to Rs. 10,000 were not uncommon in the past. In Mahboobnagar

District the annual interest rate is 18%, but in the other regions it used to

be higher, up to 40% per year. A large proportion of these loans are given

without any security; security would be demanded of relatively unreliable

clients. Security requirements would also be added at a latter stage if the

client experienced repayment difficulties. This practice indicates that -

contrary to our hypothesis 1 - security is not used by moneylenders as a rate

of return substitute, but primarily as a means to improve repayment

incentives.

Gold traditionally was an important form of security but its use as

security has virtually disappeared in the study villages. Promissory notes

were the other major form. In the past, such promissory notes enabled lenders

to insist on land sales to recover the loan amounts. But in Maharashtra the

government is no longer enforcing promissory notes issued to moneylenders and

it has become very difficulty to use land as a security. Other forms of

security are discussed in a later section,

Discussions with moneylernders revealed that traditionally default was

a relatively rare phenomenon. Rough estimates indicate that in any given year

perhaps 5% of clients defaulted completely. It is however impossible to

estimate the magnitude of losses experienced by moneylenders on the account of

defaults as partial repayr..ent may have occurred and we do not know whether

defaulters were primarily small or large borrowers,

37 -

2. Seasonal loans are given at the start of the growing season to

poorer clients for purchasing of production inputs or consumption. These

types of loans have long traditions and well established names: Nagu loans in

Telegu, savai and dhai in Marathi. Depending on the village they can be given

in tash or kind. Interest rates are high as the total repayment of principal

and interest at the end of the crop season is 1-1/4 (savai) to 1-1/2 (dhai)

times the amounts borrowed. For short duration crops (3 to 4 months) the

interest is usually 114 while for long duration crops it is usually 1/2 of

principal. Thus annual interest rates amount to about 100% on these loans.

But inconsiderir.g these interest rates it should be remembered that most

borrowers take such loans only once a year, and that -- given limited

intermediation -- the money lender may not have alternative uses for the funds

for the remainder of the year. It is therefore most unlikely that the annual

return or funds lent out in this manner amount to the full 100%.

In Aurepalli the repaynent system for the nagu loans is very

strict. The large moneylenders have regular employees who visit the clients

or their fields to find out when the harvest will take place. The moneylender

will then go to the threshing floor himself or send the employee with a

bullock cart to recover the principle and interest at the time of threshing.

However, we have not been able to document such rigorous practices for the

other 5 villages for the lifetime of the older informants. Even in Aurepalli,

if crops fail moneylenders are quite flexible and will roll over the loan to

the next crop year, adding another 1/4 or 1/2 to the principal to be collected

at the end of the next harvest. Given their precise information of crop

status they face no real asymmetric information problem in taking such

rescheduling decisions. This practice is consistent with the insurance

38 -

substitute function of loan (H-14), and has been documented more broadly by

Jodha.

3. Loans to regular employees. Major moneylenders rarely deal with

landless workers who neither have land nor a crop enterprise as actual or

potential security. This confirms our hypothesis H-6 that moneylenders select

customers with high repayment incentives. Consistent with H-3, H-7 and H-8 in

all six villages, the only way for the landless of getting loans of

considerable magnitude such as for purchasing bullocks or for marriage is by

entering into a long term labor contract. This system has already been

described in detail in Binswanger et al 1984. The lenders are usually

farmers, who in turn may be indebted to moneylenders. In both villages of

Mahboobnagar the farmers take explicit interest on these loans at the rate of

18 or 24%o In the four Maharashtra village the lenders take no explicit

interest payments.

in Dokur village of Mahboobnagar labor brokers recruit migrant

workers construction projects, elsewhere. The labor broker provide loans to

the migrant workers, a feature also described in Breman. However, consistent

with H-4 we found no instances where workers coming to work within the

villages from elsewhere were provided with loans.

4. Small short term loans or advances: In Sholapur and Akola Districts

people of equal economic status give each other small interest free advances

which are expected to be repaid in very short periods of time, measured in

days or weeks. The amounts given range from 5 to 50 rupees for landless and

small farmers, and up to 200 rupees for better off groups. Borrowers and

lenders are friends or relatives. Note that these advances are not given in

the expectation that the borrower will have to reciprocate by giving advances

- 39 -

at a later stage, but reciprocity may be in some other form. Consistent with

H-5 collateral is not take on such small advances. In both areas employers or

potential employers may also give very small amounts to workers for a few days

but these loans are not usually repaid in the form of labor, i.e., they are

not an advance labor booking system as reported elsewhere in India (Bardhan

and Rudra).

In Mahboobnagar short term loans among people of equal status are

also given, but usually with interest payments even among relatives. The

tradition of giving and taking interest is thus much better developed in

Mahboobnagar than elsewhere.

Borrowers have strong references among these loan types. Short term

advances from friends and relatives or medium term money lenders loans are

preferred over the crop loans or the loans linked to labor contract.

Consistent with H20 collateral risk borrwers in good standing would not result

to the two latter types of loans.

Kind and Cash lending

In the Mahboobnagar villages, where traditional moneylending still

exists, most short term loans and a large proportion of medium term loams are

given in kind. Moreover, some loans which are taken in cash are repaid in

kind. On medium term loans interest rates for loans repayed in kind are

generally 18%, while for loans repaid in cash they vary from 24 to 30%. As

much lending occurs at the beginning of the crop cycle to be repayed at

harvest time, this preference for kind repayment by lenders is a puzzle, as

crop prices are generally lower at harvest time than at the beginning of the

crop cycle. One element of the puzzle is provided by the fact that accounting

prices for kind repayments of loans taken in cash are usually lower than

40

prevailing market prices in the village, An investigation of 11 loans repaid

in castor beans or paddy reveals that the accounting price is about 8.5% lower

than the prevailing market price, a difference which is statistically

significant. But that difference is insufficient to account for both the

interest rate differential and the seasonal differences in crop prices. If

moneylenders give a large proportion of loans in kind then they save cn

marketing costs by receiving repayment in kind. Marketing costs must

therefore be considerable in these villages to lead to such strong preferences

for kind repayment.

Where loans are taken in kind and repaid in kind, interest rates are

calculated using the commodity as the unit of account, i.e., changes in

commodity prices between taking the loan and repaying it are not taken into

account.

The preference by moneylenders for kind transactions is not a

attribute of all moneylending systems. In the Akola region, which

traditionally was a cotton exporting area, traditional moneylenders used to

lend primarily in cash, while in the Sholapur area both casd and kind loans

were common. It was possible to repay cash loans in kind or kind loans in

cash. And in these villages the accounting prices for kind transactions were

tied closely to the market prices prevailing when loans were taken or

repaid. The minor moneylenders which have replaced the traditional lenders in

the Sholapuir and Akola villages now have a preference for cash transactions,

but they are willing to deal in kind as well.

Lending and Land Acquisition

Mead Cain studied land sales and acquisition of the sample households

over their lifetime in three of the six villages (Aurepalli, Kanzara,

- 41 -

Kinkheda). He shows that, contrary to our hypothesis, distress and drought

were not major factors in leading to land sales. In particular, he shows that

the great Maharahstra drought from 1970-73 did not lead to an increase in land

sales activity as implied by H-17. He attributes this finding to the fact

that the Maharashtra government operated large scale relief works in the

areas. Indeed Jodha (1978) had shown earlier that in the Sholapur village-,

which were most severely affected by the drought, wages from public employment

amounted to 46.5 percent of total income in a sample of 80 households during

the third drought year 1972-73. This source of income is obviously not

covariate with crop income. Jodha also noted that credit paid only a minor

role in stabilizing consumption in these villages, as credit represented only

9% of total income during the third drought year 1972-73 (H-15). But we

should also note that by 1972 it had become virtually impossible under

Maharashtra law for lenders to insist on land sales as a means of recovering

debt.

Nevertheless, many suffered in the Sholapur area and evidence of the

effects of drought linger among households who either sold their bullocks or

saw their cattle die from starvation. The fact that other assets, including

cattle are sold ahead of land, however, attests to the relative illiquidity of

the land market implied in our hypotheses H-17.

Evidence from another area of the SAT however, supports the

hypothesis that moneylending can be used as a strategic tool for land

acquisition. Jodha (1978) collected data from a sample of 26 lenders in

villages of Jodhapur District who acquired a total of 58 ha of land via their

recovery procedures between 1956 and 1965 consistent with H-19. The sample of

lenders was identified by farm households who had lost land to them. Jodha

42

estimates that it contains about 25% of all informal lenders in the villages

covered. Therefore, the extent of land acq;uisition by all lenders must be

considerably smaller in the population of lenders than in his sample. Jodha

classifies his lenders into professional moneylenders, traders, and large

farmers and shows that large farmer-lenders acquired much more land via their

lending than professional moneylenders or traders. Jodha also shows that land

is typically the last asset to be sold.

Mead Cain also shows that distress sales of land by small farmers to

larger farmers were very much a feature of coping with the Bangladesh floods

and famine of 1973-1974. In a study of the village of Char Golapur he shows -

consistent with H-17 - that small and medium owners were net sellers during

that year and the following year. Large owners sold about as much land during

the period 1970-1974 as they bought but become substantial net sellers in

1975-76. Mead Cain did not study whether the land buyers were primarily

lenders or not.

It thus appears that drought/floods or other calamities do indeed

lead to distress sales of land as hypothesized. But the Sholapur experience

also shows that judicious government intervention via public works can prevent

this from happening. Land sales are the last resort of households in distress

who have no ther alternatives. Such households clearly would prefer to work

on public works or sell off other a.ssets than land,

2.2 The Imnpact of formal Lending Institutions

Formal lenders - Land Development Banks and Credit Cooperatives -

became important in the four villages of Maharashtra between 1950 and 1965.

Land Development Banks, the long term lending institutions, also exist in

Mahboobnagar District but have become important sources of loans only for very

- 43 -

few large farmers. Both Mahboobnagar villages created cooperative credit

societies, but they are now defunct, either because of misappropriation of

funds or because of recovery difficulties.

Farmers who regularly used seasonal or medium term loans from

moneylenders had strong incentives to shift either to long term loans from the

LDB's or to seasonal loans from the cooperatives, leading to lower interest

payments and longer repayment terms. Many farmers in Shirapur claim that they

used loans from formal sources to repay moneylenders, although we do not have

detailed knowledge of the extent of such repayments. For the Akola villages,

however, we have more detailed information about how borrowers used their

first loans from official sources (Table 4): Of 46 loans for which we have

data, less that 40% were used entirely for the agricultural purposes for which

they were taken. Another 40% of the borrowers used between 50% and 89% of the

loan amounts for agricuitural purposes. The main alternative purpose for

which the loans were used were consumption. The number of loans used entirely

to repay moneylenders is only about 10%. For the Akola villages we also have

data to indicate the actual uses of the funds from the current loans, which

appear to conform even less to the stated purposes than the initial loans,

despite the enormous efforts made by the official credit institutions to

insure use of the funds for agricultural purposes. The loans which are taken

from a variety of informal sources are, however, used substantially less for

agricultural purposes than the official loans. As seen in the third row of

Table 4, almost 3/4 of these loans are entirely used for consumption or for

other nonagricultural purposes.

This shift of borrower's portfolios to borrowing from formal sources

undermines the profitability of moneylending, especially as in the beginning

- 44 -

of the cooperative movement large farmers were the main borrowers. The

moneylenders thus loose their best clients. In the four Maharashtra villages

all but one of the major moneylenders have given up their business and shifted

their assets either to farming or to the cities. All five moneylenders of

Aurepalli claim that their number of clients has decreased over the past 5 to

10 years and that they have, or would prefer, to shift their portfolios to

alternative investments. Decline in repayment discipline of clients is given

as the main reason for their desire to reduce the moneylending activities.

In the place of the large moneylenders have appeared a number of

minor moneylenders who lend out smaller total amounts than the traditional

moneylenders. These lenders are usually farmers or small traders, and

occasionally women who normally lend to other women.

These new lenders tend to lend smalLer amounts per loan for shorter

duration, and at higher interest rates. (In Shirapur, for example, the

interest rate charged by minor moneylenders has recently increased from 40% to

60%.) The medium term moneylenders market has completely disappeared from the

Maharashtra villages. Only relatively unattractive forms of lending survive,

i.e., the market for short term crop/consumption loans and loans by employers

to long term workers. These sources are only resorted to by people who are

rationed by the formal sources, i.e. cannot borrow at all or only

insufficiently. Thus the quality of borrowers faced by moneylenders has

declined. Moreover, since the formal institutions cannot Lend for

nonagricultural purposes the informal sources tend to specialize in loans for

nonagricultural purposes.

- 45 -

Table 4

Use of Loans in Akola Villages

TotalNumbers and Proportion of Loan Used for Agriculture of Loans

0 - 9% 10-49% 50-89% 90-100% Observed

First Loan Ever 4 5 20 17 46Taken From (9) (11) (43) (37)Formal Source

Current Loan Taken 4 3 10 4 21From Formal Source (19) (14) (48) (19)

Current Loan From 25 3 5 1 34Informal Source (73) (9) (15) (3)

Numbers in colums are the numbers of loans of which the indicated proportionhas been used for agricultural purposes. Numbers in brackets are percentagesof total observed loans.

- 46 -

Appendix Tables 101 to 1.3 amply bear out these points. They show

the distribution of total borrowings during agricultural year 79-80 by source

and purpose in the three regions. Note that all official loans are shown here

by their stated agricultural purpose: but we know from the more careful data

collection underlying the data in Table 4 that the actual uses of these loans

differ substantially from the stated purposes.

The Tables show first that the total volume of lending in the three

regions is roughly the same, with Sholapur having about Rs. 20% more in total

debt than the other two regions. Table 5 we show the overall debt, the

debt/equity ratios and the debt/net income ratios of the sample households in

these three regions. The debt equity ratios are virtually the same in all

three regions and are low consistent with the discussion under C-l1. The

debt/income ratio is the highest in Sholapur, followed by Mahboobnagar and

Akola. Based on all three measures, total volume of loans, debt/equity ratios

and debt/income ratios, the moneylending system in Mahboobnagar appears to

support no less credit than the formal system in Maharashtra. We cannot, of

course, conclude firmly from this that the official sources in Sholapur and

Akola regions have only substituted for moneylenders' loans, as moneylenders'

loans could have been substantially lower in the Maharashtra areas prior to

the emergence of the formal sources.

As shown in table 6 the ur-fficial sources account for only 15.7% of

total loan volume in Akola and 31.1% in Sholapur, while they account for over

63.3% of loans volume in Mahboobnagar District where the traditional

moneylenders are still in business. Moreover, in Mahboonagar, almost two

thirds of private. moneylenders lendings are used for agricultural purposes;

while in the Maharashtra villages this is less than one third. Indeed,

47 -

Table 5

Debt/Equity and Debt/Income Ratios of the Samples as a Whole

Overall Debt DebtDebt Equity Income

(Rs 100)

Mahboobnagar Villages 207.3 .11 .97

Sholapur Villages 342.5 1/ .12 1.23

Akola Villages 194.3 .11 .76

There are an equal number of 40 households in each of the villages.All India debt/equity ratios:

1/ A portion of this is clearly not recoverable.

x 48 -

Table 6

Distribution of Credit by Source a/

Mahboobnagar Sholapur Akola

Government Agencies 51 19(13.4) (21.6)

Commercial Bank 4 3 2(9.6) (1.0) (2.0)

Cooperatives 6 80 61(26.6) (54.6) (60.7)

All Official Sources 10 134 82(36.2) (68.9) (84.3)

Moneylenders 81 18 12(45.0) (6.7) (3.9)

Relatives 24 12(5.6) (3.7)

Friends 1 16 2(0.1) (18.2) (0.1)

Private Shops 4 38(1.1) (4.6)

Employees 19 2 3(5.2) (0.1) (0.4)

Tenants 1(0)

Others 4 1 21(12.4) (0.4) (3.0)

All Informal Sources 110 61 88(63.8) (31.1) (15.7)

a/ Number of Loans from each source and percentage of total sampleloan volume in parenthesis.

- 49 -

private moneylenders in Mahboobnagar have financed a substantial number of the

wells and pumpsets which have been installed there during the past decade.

2.3 The Current Credit Situation in the Three Regions

M.J. Bhende (1983) described the current distribution of credit by

sources, purposes, and farm size groups in detail for 3 of the six villages

(Aurepalli, Sholapur, Kanzara) using averages over 5 years. We will therefore

be very brief as these villages represent their respective regions well.

Table 6 gives the distribution of credit by source. In Mahboobnagar

only 10 loans came from official sources. These came primarily from

commercial Banks and the Land Development Banks, the long term lending branch

of the cooperative movement. These loans were large and went primarily to

large farmers. Despite the low number of loans they still amount to 36.2% of

credit outstanding. One single tractor loan of Rs. 51,000 amounts to 68% of

all loans from the official sources. Moneylenders gave out a total of 81

loans or 45.0%. From the appendix tables we see that about two thirds of

moneylender credit is used for agricultural purposes (Appendix Table 1.1);

that nearly half the loans are less than Rs 500 with only 1 loan exceeding Rs

5,000 (Appendix Table 2.1); that three quarters of these loans (and 95% of the

loan amounts) carry interest rates from 15 to 30%, i.e. it is only very small

loans which are subject to highly usurious interest rates (Appendix Table

3.1). Moreover, nearly all the moneylender's loan are given without explicit

collateral (Appendix Table 4.1) and that none of the loans are considered in

default or overdue (Appendix Table 5.1).

In Sholapur official sources provided 69% of all loans outstanding.

During the severe drought of the early 70's various government agencies have

50 -

issued a variety of loans such as for fodder or to purchase inputs and draft

animals in post drought years. Virtually, all of these loans are overdue or

completely defaulted (Appendix Table 5.2). Among cooperative loans the long

term LDB loans have the worst repayment performance: 80% of them are

overdue. Of all cooperative loans (short, medium and long term) only 41% are

not overdue (representing 23% of loan volume). Friends lending without taking

interest account for 18% of the lending volume while moneylenders account for

only 6.7%. This lending among friends is a special feature of the Sholapur

villages and may be accounted for by the difficulties experienced by the

offical credit agencies.

Official credit has nearly replaced informal credit sources in the

Akola villages. While it accounts for only roughly half the loans it accounts

for 84.3% of loan volume. The informal credit market is clearly a "tcurb"

market accounting for many small loans, Private shops moneylenders and

relatives account for about 4% of loan volume each, with private shops

providing the largest number of relatively small loans. Indeed all but 2 of

their loans are below Rs. 500. More than two thirds of these loans carry no

nominal interest charge. The private shops in this case are mostly clothes

merchants in the taluka headquarters who come from one of the two villages and

have kept close links to their village. This is the only village where

consumer credit has any importance at all. Most of the borrowers from

official sources have loans which are overdue or in default. The government

loans were mainly from a computlsory funding program aimed at reducing soil

erosion. All but one of these government loans are in default for more than 5

years (Appendix Table 5.3). Of the total loan volume from official agencies

only 22% is in good standing.

- 51 -

Both the Sholapur and Akola villages have acquired a "culture" of

nonrepayment of official loans in which defaults from official sources are

public knowledge and where no stigma is attached to failure to repay. This is

widely observed phenomenon in rural credit schemes (von Pischke et. al.).

Indeed respondents were quite happy to talk about their overdues.

The poor repayment performance arises despite the fact that the

official credit agencies operate within a comprehensive leagl framework which

gives them ample power to recover credit. In Akola region, moreover, they can

recover credit via the monopoly procurement agency for cotton which can

subtract outstanding debt to official credit agencies from the amounts owed to

the sellers. As can be seen from Appendix Tables 4.1 to 4.3, only a tiny

fraction of loans has no formal collateral requirement in the form of land or

third party guarantees. Third party guarantees are especially frequent in

Akola region but we know of no case where repayment has ever been received

from a guarantor. Official credit agencies also virtually never use their

power to foreclose on land used as collateral.

Bhende has shown that in all three regions official loans go

disproportionately to larger farm households, and that larger farm households

have poorer repayment performance than smaller ones.

Defaulters can often not borrow additional amounts from official

credit sources. Nor can they borrow for consumption in poor years. Demand

for credit by such borrowers nevertheless arises. However, the small informal

lenders cannot use land as a collateral. As they are not registered under the

moneylending registration act, they cannot use promisory notes.

Two types of responses seem to arise from this situation. First,

consistent with H-9, borrowers and lenders seek alternative forms of

52 -

collateral. In the Sholapur area land is sometimes rented out with a

requirement that the rent be paid in advance. This phenomenon was more

important in the years immediately following the drought of the early

1970's. During that period we also formed usufructuary mortgages where a

lender would get to use land of borrower for several years in a row until the

borrowers had repaid the loan either in cash or as imputed land rent. And we

found one case where land was actually sold to a lender with an understanding

that it would be given back to the borrower upon repayment of the loan.

A second possibility is that the importance of loans from friends,

relatives or shops in the Akola and Sholapur villages arises from the

difficulties of obtaining loans from formal sources and the absence of

professional moneylenders. Note also that repayment to these informal sources

is good to excellent in both of the regions. Selected informants in Sholapur

also claim that interest free loans to friends are the first ones they repay,

presumably to maintain borrowing from this source as an option. In Akola

region we asked all sample members the same question and out of 32 respondents

29 maintained that their highest repayment priority was interest free loans

from friends, relatives or other sources. Thus repayment discipline and

ethics have not deteriorated substantially for unofficial and informal

sources.

Preferences for Collateral

As shown in Appendix Table 2 very little collateral is taken by the

informal lenders in these villages. (The formal institutions either insist on

land or on third party guarantees.) Apart from the strong preference for land

little can therefore be said about collateral, preferences ir the informal

markets. Consistent with table 1 we find no use of animals as collateral and

53 -

virtually no use of consumer durables (consistent with H-13). On the other

hand the use of gold, which should have a high collateral value, is also not

prevalent. With respect to H-10 we can therefore only see the strong

preference for land.

Women's Access to Borrowing

In all six villages it is difficult for women to obtain loans in

their own right. Widows who are heads of households are the only women who

are not completely rationed out of the credit markets and can borrow openly

from official sources or moneylenders. Moreover, since wometi are not offered

long term labor contracts in any of the villages, they cannot obtain loans via

labor - credit links. Some women lend and borrow small amounts among

themselves on a largely secret basis. Indeed a small fraction of the small

moneylenders are women.

Chit Funds

One of the forms of borrowing and lending used by women is chit

funds. Such revolving credit societies have been described by Clifford Geertz

and others. They are vehicle of borrowing and lending used by only a small

fraction of villagers. First, they do not exist in the Akola area. In the

Mahboobnagar and the Sholapur areas we have studied them in detail. In

Aurepalli two such chit funds exist with members from both within and outside

the village. The funds have 20 and 25 members respectively with monthly

contribution of Rs. 100 and 200 Rs respectively. Their membership is closely

overlapping and consists of teachers and other salaried officials, traders and

shopkeepers and moneylenders/farmers. Only one pure agriculturalist is a

member. The chits are allocated to individuals using bidding procedures, i.e.

individuals have some control over whether they want to be net borrowers or

- 54 -

lenders in the funds. The chits are largely used (1) as working capital by

traders, (2) to save towards the purchase of large consumer durables by

salaried employees and (3) as investment vehicles by moneylenders0 The fact

that pure agriculturalists do not participate in these chit funds is easily

explained by the seasonality of their receipts and outlays: It would be

difficult for them to come up with savings of RS 200 every month on a regular

basis. Salaried people can more easily save a fixed portion of their salary

month after month.

In Shirapur, 3 chit funds with 10 to 16 members each but overlapping

membership are operated almost exclusively by women. Only 2 males

participate. The chits are allocated by lots, i.e., the net savers earn no

interest. The monthly contribution for 2 of the funds are Rs 50, while they

are Rs 10 for the third. As few of the women are household heads, the chit

funds are a way for women to accumulate cash for special purchases in an

environment where they have virtually no alternative credit or savings

instruments available.

Chit funds are a marginal form of credit and savings with little

relevance for the agricultural economy of the villages. Moreover, their

requirement of regular contributions over the year and the uncertainties

surrounding the timing of obtaining the chit makes them largely unusable as a

financial ilnstrument for agriculturalists. Note that their presence is a

further indication of the rationing in rural credit markets. Only highly

rationed individuals who cannot obtain open credit lines from the formal or

informal credit market would consent to the highly structured nature of the

borrowing opportunities provided by a chit fund.

- 55 -

Credit as an Insurance Substitute (H-14)

The cooperative credit societies and land development banks do not

want to take up this function. However, their behavior when repayment

difficulties occur, namely to eventually reschedule loans, is consistent with

an insurance substitute function. Note on the other hand, when government

agencies explicitly advanced loans for drought relief, such as fodder loans in

Sholapur, they were faced with virtually universal default later on,

The informal system is perhaps somewhat better at the insurance

function. It grants many loans for consumption purposes and often has

flexible repayments terms for both medium and seasonal loans (Section 2.1 and

Jodha). But Jodha has also shown that none of the drought prone regions which

he studied did credit provide a major portion of subsistence needs in drought

years. Asset sales and employment were the most important means. Thus, the

role of credit as an insurance substitute may not be very large for covariate

risks. We have not investigated the sequence of individual specific disasters

and borrowing behavior, so we cannot judge the role of credit as insurance

substitute for noncovariate risks.

Multivariate Analysis

The relationship discussed so far can be summarized via multivariate

analysis, which was performed with 5 years of data from one village each in

the three regions (Aurepalli, Shirapur, Kanzara).

In Table 6 we show the results of five Tobit regressions on five

dependent variables. Tobit regressions are chosen because each of the.

dependent variable is a limited dependent variable. A substantial proportion

of households do not borrow at all or do not have overdues. The values shown

in Table 7 are the elasticities of the expected values of the dependent

56 -

variables with respect to the explanatory ones, evaluated at mean values of

the sample.!/ Table 7 means and the CVs of each of the variables are also

given in columns 1 and 2.

The regressions reported are reduced forms as they do not correspond

to a fully specified model of credilt market behavior. The coefficients

reflect associations between explanatory and dependent variables.

Interpretation as to the direction of causality must be done cautiously. For

some variables, however, causal directions are relatively clear.

The first regression (column 3) concerns the total volume of credit,

irrespective of its sources. In columns 4 and 5 we then see how this credit

is derived from formal lending agencies and from informal sources. The total

amount of overdues is analyzed in column 6 and in column 7 overdues are

expressed as a proportion of total loans taken.

Personal Characteristics

Of the personal characteristics only family size and education appear

to affect the total borrowings significantly and positively. The elasticity

of family size is 0.27 while that of years of schooling is only 0.08. On the

other hand, personal characteristics sharply influence the source of credit.

Large households of high caste rank with an educated older head are much more

likely to borrow substantial amounts from forma sources. The elasticities

are large as well ranging from 0.66 for age to 0.28 for schooling. Because

households with these characteristics borrow more from formal sources, they

also receive the benefits of subsidized interest rates.

5/ Elasticities given for all the explanatory variables are the elasticitiesof the expected mean E(Y) in the Tobit regressions (Tobin 1958).

- 57 -

Table 7

Borrowing Behavior in Six South Indian .illUages

Coefficient Non-Variables Mean of Total rnstitutional Inscicucional Overdue Jeraul:

Variation Credit Credit Credit Ratio

(1) (-2) - Y T- 3 4 () -6) C5--Operated Area 4.69 134.55 .564 .579 .416 -. 252 -. O0161

(Ha) (4.66)*** (3.16)*** (2.53)** (-1.21) -(.00803)

Operated Area 61.64 253.65 -. 413 -. 472 -. 209 .0322 -. 0656(Ha)2 .(7.05)*** -(5.46)*** -(2.68)*** (.313) -(.644)

Assets 30.05 125.50 -. 0923 -.236 .278 .769 .400( -OOLS)2 -(.644) -(1.09) (1.41) (3.06)*** (1.66)*

Assets Sq. 2,321.9 268.90 .311 .360 .0557 -. 239 -. 143(OOORS) 2

(5.77)*** (4.48)*** (.789) -(2.40)** -(1.48)

X Irrigated 16.16 246.80 .0491 .0359 .0888 .0237 -.0199(2.49)** (1.16) (3.38)*** (.704) -(.610)

Livestock Value 2,087.1 124.48 -. 0565 .125 -.194 -. 0869 -. 0501-(1.06) (1.46) -(2.61)*** -(.905) -(.544)

Family Size 5.92 47.43 .268 .529 -. 0148 .676 .403(2.36)** (2.98)*** -(.094) (3.51)*** (2.20)**

Ratio Worker/ .62 32.79 -. 0920 -. 141 -. 245 -. 653 -.737Family Size -(.571) -(.539) -(1.10) -(2.21)** -(2.66)** i~~~~~~~- I B

Age of Head 46.93 25.81 .0381 .659 -. 108 -.354 -. 125(.183) (1.82)* -(.379) -(.94) -(.353)

Schooling of Head 2.59 137.58 .0820 .286 -.138 .171 .108(1.94)* (4.42)*** -(2.28)** (2.38)** (1.58)

Caste Rank 49.93 55.32 .138 .572 -.161 384 .170(1.29) (3.21)*** -(1.08) (1.:98)** (.934)

Sex .052 428.54 -.0105 -. 0279 -. 0138 -. 0500 -. 0448-(.895) -(1.22) -(.868) -(1.86)* -(1.85)-

Risk Aversioa 1.216 73.18 .0115 .192 -. 0536 .227 .149(.166) (1.60) -(.557) (1.77)* (1.24)

1977-78 .2 200.175 -. 0231 .0118 -. 0851 .0828 .0951-(.804) (.249) -(2.12)** (1.53) (1.89)-

1978-79 .2 200,175 -. 00626 .0035 -. 0159 .190 .184-(.217) (.073) -(.404) (3.60)*** (3.71) '

1979-80 .2 200.175 .0656 .0375 .0756 .124 .108(2.29)** (.783) (1.94)* (2.28)** (2.11)*"

1980-81 .2 200.175 .0544 .0614 .0572 .101 .062)(1.84)* (1.25) (1.43) (1.77)* (1.17)

Shi .336 140.63 -. 0198 .540 -. 212 .268 .201-(.497) (7.06)*** -(3.96)*** (3.55)*** (2.83)***

Kaz .328 143.39 -. 0549 649 -.398 .259 .244-(1.29) (7.86)*** -(6.69)*** (3.16)*** (3.20)

Luck .845 222.51 .00528 .023 -. 0152 .0334 -. 030!(.25) (.603) -(.529) (.834) -(.812)

* ' .6

58

The same characteristics which enable households to borrow from

formal sources also appear to enable them to default on their loans. The only

exception is age, i.e. older people seem to have lower overdues than younger

ones. Measurable personal characteristics have no statistically significant

impact on borrowing from informal sources, except for schooling whose sign is

negative. Family size, the dependency ratio, caste rank, age and risk

aversion have negative impacts on informal lending but these are not

statistically significant.

The number of workers per family size reduces loan demand, but this

is not statistically significant. On the other hand, it significantly reduces

overdues, with an elasticity of -.64. Large families with few workers are

clearly a much higher credit risk than others, Sex of the head of household

has little impact on borrowing behavior, but females appear to have a somewhat

better repayment record than males.

Farm Size and Asset Position

In Table 7, we see that irrigated area tends to increase credit use,

and in particular from informal sources. This may reflect the increased

requirements for labor and other inputs, not all of which can be financed from

formaL sources. Livestock ownership tends to significantly reduce credit use,

in the informal credit market. As informal credit is often short run in

nature, the presence of a regular livestock income may reduce such credit

demand. Furthermore, animals can be sold as an alternative to borrowing.

The effect of operated area and of total value of assets are

complicated for two reasons. First both linear and squared terms are

present. In Table 8 the values of the derivatives are therefore evaluated for

selected values of operated area and wealth. In addition, where relevant, the

Table 8

Derivatives of borrowings, Overdues and Loan TeresWtth Respect Lu Operated Area asnd Wealth

-Total Turn- Joint Expansioai of OwntedOperated Area Tonal sngtsand Operated

l ng .ingI Ila 4.68 Ila 30 Ha iVoint. Ra I Rs 30 RK 100 Point I lla/I Rs 4.6811a/30 Rs 30IIa/IUU Rs

Total Credit 368.72 198.58 -971.04 8.98 -9.661 17.13 81.78 11.5 321.3 282.4 -510.8(To0ulT) 4.42*** 3.09*** -7.63*** -. 59 1.37 9.52**A 4.12*** 4.7o*** -4.61***

Institutional 277.9 132.9 -864.5 8.05 -19.4 3.74 59.5 25.3 183.1 151.2 -573.2Credig 2.95*** 1.82k -6.24*** -1.05 .26 6.39*** 2.07** 2 .20** -4.24-**(TOBll')

Non-inatirutiozial 171.5 119.3 -240.4 13.1 19.5 22.4 29.4 NP 266.8 228.8 -9b.6Credit 2.49i* 2.24** -2.35** 1.42 2.10*0 4.31*** 4.14*** 4.59*** -. 9)(TOBIT)

U'Overdue -92.8 -86.0 -39.4 51.4 44.8 34.2 8.78 124.2 125.8 81.4 3.61 ' .0

(TOliT) -1.27 -1.53 -. 34 3.07*** 3.11*** 1.15 1.840 1.55 .03

Default Ratio -.00147 -.00611 -. 0361 NP .00782 .005b9 .UOU566 107.8 .0363 .0213 -. 0358(TOBIT) -. 06 -. 34 -. 98 1.66* 1.61 .23 1.63 1.25 -. 95

Curresit Balanice 236.2 178.0 -221.8 15.9 -7.20 -3.15 6.64 52.5 210.9 1b2.6 -189.3(OLS) 2.72**tv 2.60A** -I1.53 -. 53 -. 28 .97 2.51** 2.63*** -I .11

lnrereut Rate 6.24 3.59 -14.6 9.6bl -.081 - .10b -. 164 NV' 5.84 3.08 -15.4(TOBIT) 2.97*** 2.55*** -2.67*** -. 33 -.51 -1.31 2.93* 2.38** -2.8

Collacer4l -. 0478 -. 0178 .189 1.86 -. 1'3 -. 010 -. 0019 117.1 -. 110 -.0)65 .119(LOGIT; -. 42 -. 19 .90 -. 71 -. 63 -. 22 -1.02 -. 77 .85

He* aj (T-Statiutc) ** 5% x - two ta led**a 1%

60

turning point where the sign of the relationship changes has been calculated.

Second, the major component of total assets is owned land.

Therefore, total assets and operated area are correlated. Multicollinearity,

however, is not so large as to prevent the estimation of the separate effects

of assets and oper-ated area. It is important to interprete the derivatives of

operated area as partial derivatives, and vice versa for total assets. For

example, the derivative of total credit on operated area of 368.72 tells us

that a farmer with a fixed level of wealth will borrow 368 rupees more if he

expands his operated area from 1 ha to 2 ha, holding assets constant.

Obviously, he can only do this if he rents the extra land rather than buying

it. Conversely, an individual who has Rs 1,000 in wealth will reduce his

borrowings by Rs 9.9 if he should get an extra Rs 1,000 in wealth but would

continue to farm the same area.

For the sample as a whole the mean value of owned land per hectare is

Rs 4893. The effect of increasing operated area via the addition of 1 hectare

of owned area valued at Rs 4893 can be called ay and is equal to

aA = OPA + 4 -893 where is the derivative with respect to20 0P TA 3-OPA '

operated area and ay- is the derivative with respect to assets.

"Other things equal" an increase in operated area alone first sharply

increase total credit use up to an area of nearly 9 hectares, but then leads

to a progressive reduction in credit demand. Assets, on the other hand, have

no clear relationship to borrowing at low levels, as the positive or negative

derivatives are not statistically significant for overall borrowing or for

- 61

formal or informal borrowing. But at high levels of wealth, greater assets

tend to be clearly associated with larger borrowings. The point where assets

start to matter is reached earlier for informal credit than for formal

credit. As the derivatives are always less than 100, debt rises more slowly

than assets even at high levels of wealth.

Repayment performance, as measured by overdues, is only related to

assets at low levels of wealth, with the poorest having the lowest overdues.

If overdues are measured in relative terms, by the "default ratio" an increase

in assets still appears to lower repayment performance at the lowest wealth

level. However, we cannot show any statistical impact of operated area on

repayment performance or of a joint expansion of assets and operated area. In

relative terms repayment performance is therefore not affected by farm size.

A joint expansion of owned and operated area, i.e. the addition of

one owned ha of operated area also follows a curvilinear relationship with

credit use. It increases overall credit demand up to an area of about 10 ha

and then tends to reduce it. Formal and informal credit follow similar

patterns.

The village dummy variables confirm what the descriptive analysis has

already brought out. Village has no significant impact on total borrowings.

But the two Maharashtra villages borrow more from formal credit agencies, less

from informal sources and have much higher overdue amounts and overdue ratios.

Loan Terms in the Informal Market

From Tables 9 and the derivatives which are also shown in Table 8, we

see the following associations: the size of each individual loan rises with

operational holding size (up to 15 ha) but not with the asset position of the

lender. None of the other personal characteristics has an statistically

62

Table 9Loan Terms in che Informal Market

Coefficient Current IntereseVariables M4ean of Balance Rat_e Collateral

Variation (OLS) a/ (TOBIT) 51 (LOGIT) C/

Operated Area 3.22 139.81 .994 .7561 -.056(Ha) (2.73)*** (3.01)*** -(e459)

Operaced Area Sq. 30.5 307.24 -. 295 -.370 .00408(Ha)

2 -(2.26)** (2.91)*** (.842)

Total Assets 26.8 165.38 -.241 -. 0728 -.0128('OOORS)

2 -(.542, -(.327) -(.714)

Total Assets Sq. 2,667.7 465,64 .229 -. 0376 .0000545(OOORS) 2

(1.76)* -(.562) (1.04)

Total Family Size 5.48 49.04 -.400 .280 -.124-(.305) (1.16) -(1.17)

Ratio Workers/ .722 28.38 -. 0134 -. 0984 2.15Family Size -(.0176) -(.258) (1.86)*

Schooling of Head 2.68 123r05 .109 -. 159 -. 00914(.591) -(1.56) -(.118)

Age of Head 48,4 24.86 -. 181 .541 -. 0104-(.214) (1.27) -(.554)

Sex .0737 355.19 -. 0126 -. 00251 -1.22-(,228) -(.0919) -(1.64)

Caste Rank 48.4 56.1 -. 218 -. 251 -. 0143-(.571) -(1.33)

Land D .0281 589.45 .0225 .0315(.698). (1.96)** -

Lab D .0667 374.82 -.00605 -. 00976-(.118) -(.400) -

Other CD .0491 440.74 .0910 -.0567(2.11)** (2 .52)*e -

Coll D .158 231.35 - - -

Luck .979 200.48 .00480 -. 146 -. 179( .050) (3.13)*** -(1I 69)*

Risk Aversion 3.39 56.72 -. 0163 .0269 .0751-(.0476) (.161) (.766)

Defaulc Ratio .140 194.11 -. 0956 .0478 2.63-(.903) (.8S6) (3.64)***

Dokur .242 177.24 -. 196 .101 .141(1.35) (1.54) (.255)

Shi .165 225.43 .0168 -. 228 -.539(.155) -(4.18)*** -(.812)

Kal .0702 364.65 -. 0727 -.187 -. 526-(1.16) -(4.75)**4 -(.618)

Kaz .105 292.06 -.146 -.0820 -1.07-(1.82)* (2.04)** -(1.38)

Kin .239 178.95 -.310 -. 172 -t.20- 1.93)* -(2.17)** -(1.62;)

Intercept - - 1,459.8 - -1.11

(4.12)*** -(.792)

a/ Elasticity at means and (T.Statistic).b/ ElascitcCy of E(Y) and (T.Scatiascic).c/ Maximum likelihood estimates and (T.Statistic).

-'-A -

63

measurable effect on loan size. Of all the collateral dummy variables only

"iother" collaterals seem to be positively associated with loan size.

Interest rates appear to first increase and then decrease with

operational holding size, but not to be influenced by wealth. Again other

personal characteristics do not matter, If land is taken as collateral,

interest rates appear to be higher while they appear to be lower with "other

collaterals". Clearly this is not consistent with the use of collateral as a

rate of return substitute (H-1). On balance, interest rates are lower in the

Maharastra villages than in Andhra Pradesh, as many small loans are given

interest free.

Contrary to H-3, whether collateral is taken or not does not appear

to be related to farm size or wealth. This is consistent with repayment

performance being largely independent of these two variables, as found in the

formal market for the default ratio variable. But some personal

characteristics count: the higher the caste rank the lower the probability of

collateral. This may reflect selection of borrowers with high repayment

incentives in the form of reputation losses (H-6). The lower the dependency

ratio, the more likely is the use of collateral, a somewhat surprising

finding. And the poorer the repayment performance (default ratio), the more

likely the use of collateral.

On balance, those regression results are inconsistent with the use of

collateral as a rate of return substitute (H-l). Instead, and consistent with

verbal explanations, lenders appear to insist on collateral only for security

reasons. They impose it selectively on larger loans, and on borrowers of

lower social status, and on borrowers with poor repayment performance. It

therefore appears that repayment performance in the formal market does tend to

64

adversely affect loan terms in the iriforrnal market.

Conclusions

We will not summarize the theoretical discussion here. Table 2,

however, summarizes the implications and the results of the consistency checks

we could perform with data and observations from the villages. Most of the

hypotheses are indeed consistent with the data. The major exception is the

finding that moneylenders do not use collateral as a rate of return substitute

but primarily to secure loans. Therefore, they often impose collateral

restrictions only when it becomes apparent that one of their customers i.s a

high risk, and after they have already extended credit.

The two villages in Mahboobnagar presented an excellent opportunity

to study the functioning traditional money lending system: The structure of

traditional credit markets is quite complex and segmented. Depending on their

asset positions and reputations, borrowers face very different

opportunities. The landless only borrow extremely small amounts without a

long term labor contract. Small farmers or large farmers with a poor credit

history can only borrow in the seasonal loan market and their borrowings are

closely tied to their expected crop output. Both thetse groups are clearly

rationed in the credit market. Large farmers with good reputations, on the

other hand, have relationships with their lenders which resembles that of an

open credit line given by a commercial bank to good clients, i.e., they give

no formal security and can use the credit for a variety of purposes, repay or

extend it in a fairly flexible manner. Their lenders are primarily interested

in their overall credit position and repayment performance. While secrecy

surrounds the details of unofficial credit transactions, broad information on

credit worthiness is widely shared in the village. Moreover, for the more

65

problematic loans (seasonal or to workers) the lenders ensure that they have

very accurate information on their borrowers. The system thus is far from an

impersonal competitive market, but it does have a number of desirable

characteristics of flexibility.

Moreover, contrary to conventional wisdom, the moneylenders in

Mahboobnagar district lend considerable sums for investment purposes and for

production inputs such as fertilizers. And the total volumes of lending is

not low in villages with formal lenders. It is only in villages where

production and investment loans are emphasized by the formal credit agencies

that the informal market specializes in consumption loans. The less desirable

aspects of the traditional system (documented primarily by Jodha) is that some

moneylenders have bad reputa `nns and some do engage in strategic behavior

aimed at acquiring land.

The emergence of the formal credit system in the Maharasthra villages

has undermined the profitability of traditional money lending and led to the

disappearance of the classic large money lender system. The best clients of

the moneylender shifted their borrowing to the formal system. The impact of

the formal system on total volume of lending and investment cannot be

quantified in a cross-section comparison, but it is clear that it must have

been substantially less than the total volume of lending of the formal

agencies.

The official agencies decidedly do worse in terms of repayment

performance than the traditional system. This may partly be due to inflexible

operating procedures, and partly due to political interference or legal

difficulties which, for example, render land and third party guarantees

useless as collateral or collateral substitutes. But it may also have to do

66

with the inherent difficulty of lending in these high risk cropping regions,

discussed in Part 1 as the covariance problem. The fact that of the three

districts, Akola which has the least risk in agriculture also has the best

formal lending system is consistent with such a view.

But even in Akola the cooperative lending institution are not able to

enforce one of their main stated goals, namely to lend primarily for

production. Even with ever tightening operating procedures, the ability to do

so has not improved over time, as shown by the data on actual uses of loans.

But even if all loans were initially used for production purposes, the fact

that they are not repaid in time constitutes a diversion from the original

purpose to the extent that the original failure to repay enables higher

consumption levels on the part of the household. The approach of the

traditional moneylender and of modern commercial banks, to consider the

overall financial position of the borrower as the main function in le'nding,

thus make a lot of sense.

On other issues, our study finds results consistent with previous

work. It is hard to target lending in the formal system to the poor. But the

classic moneylender system also directed most of the most desirable medium

term loan volume to the better off groups. To lend to poor people was only

feasible with less desirable loans of shorter duration which are closely

limited to crop production or to labor contracts Some of the previous

literature has highlighted the potential of rotating credit societies in

lending and savings. We find that these instruments are of marginal value in

the context of highly seasonal agricultural financial requirements.

Appendix Table 1.1

MahboobnagarDistribution of Loan Transactions by Main Purpose and Source 1/

PurposesCurrent Food Residence Total

Sources Crop Loans Agriculture All Consumption/ Medical & Consumer Non-Agri- % of Loan& Fudder Investnment Bundinig Agriculture Clothing Education Marriage Durables Other cultural Grand Total Volumes

Government 2/

Con.'r-rcIal Banks 2! 4 4 4(19,900.0) (19,900.0) (19,900.0) 9.6

Cooperative 2- 6 6 6(55,200.0) (55,200.0) (55,200.0) 26.6

All Official Sources Jr, 10 10(75,100.0) (75,100.0) (75,100.0) 36.2

Moneylenders 28 21 49 14 2 13 2 1 32 81(20,920.3) (38,850.0) (59,770.3) (5,438.4) (620.0) (25,200.0) (1,160.0) (1,000.) (33,418.4) (93,188.7) 45.0

Relatives

Friends 1 1(200.0) (200.0) (200.0) 0.1

Private Shops 1 1 3 3 4(500.0) (500.0) (1,740.0) (1,740.0) (2,240.0) 1.1

Employers 7 2 7 2 1 19 19(2,870.O) (250.0) (6,400.0) 770.0) 300.0) (10,590.0) (10,590.0) 5.2

Tenanits I(190.0) (190.0) (190.0) 0

Others 1 1 2 1 3 4(23,000.0) (23,000.0) (1.000.0) (1,800.0) (2,800.0) (25,800.0) 12.4

All Inform,al Sources 30 23 53 26 4 21 4 2 57 110(21,610.3) (62,050.0) (83,660.3) (11,048.4) (870.0) (33,400.0) (1,930.0) (1,300.0) (48,548.4) (132,208.7) 63.8

Total 3- 30 33 63 26 4 21 4 2 57 120(21,610.3) (137,150.0) (158,760.3) (11,048.4) (870.0) (33,400.0) (1,930.0) (1,300.0) (48,548.4) (207,308.7)

% of Loan Voltume 10.4 66.2 76.6 5.3 .04 16.1 9.3 6.2 23.37

1/ Number of loans and total amount of these loans in parenthesis.?/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.3/ 12 loans where "soturce" informatI-on Is not available have been left out of the table.

Appendix Table 1.2

Sholapu r

Distrihot,ltn of Losir Trainsicrtloris by Main Pirpose stud Sotirce I/

PurposesCurrent Food Residence Total

Sources Crop Loans Agriculture All Consumption/ Medical & Consumner Non-Agri- % of Loan

& Fodder Investment Bunding Agriculture Clothing Education Marriage Durables Other ctiltuiral Grand Total Volumes

Cuvernm.nr 2/ 33 12 6 51 51

(9,877.0) (20,229.0) (2,490.0) (32,596.0) (32,,596.0) 13.6

Comimercial Banks 2/ 3 3 3

(2,320.0, (2,320.0) (2,320.0) 1.0

CuoperuiLive 2/ 31 37 68 7 1 2 2 12 80

- (47,229.0) (74,375.0) (121,604.0) (4,580.0) (301,0) (4,500.0) (1,800.0) (11,180.0) (132,784.0) 54.6

All Official Sources 64 52 6 122 7 1 2 2 12 134

(57,106.0) (96,924.0) (2,490.0) (156,520.0) (4,580.0) (300.0) (4,50n.0) (1,800.0) (11,180.0) (167,700.0) 68.9

Monoeylenders 1 2 3 5 7 3 15 I1

(51o.0) (5,100.0) (5,600.0) (4,100.0) (5,100.0) (1,560.0) (10,760.0) (16,360.0) 6.7

Relatives 2 4 6 9 6 3 18 24

(1,675.0) (2,550.0) (4,225.0) (2,560.0) (5,350.0) (1,600.0) (9,510.0) (13,735.0) 5.6

Friends 1 4 1 6 6 2 2 10 16

(300.0) (37,100.0) (90.0) (37,490.0) (1,660.0) (2,5(0.0) (2,600.0) (6,760.0) (44,250.0) 18.2

Private Shlops

Employers 1 1 2 2

(20000) (200.0) (400.0) (400.0) 1

Otthers 1 I

(1 ,UO0l .0) (,1000.0) (1,000.0) .4

All Informal Sources 4 11 1 16 20 1 16 8 45 61

(2,475.0) (45,750.0) (90.1)) (48,315.0) (8,320.0) (200.0) (13,150.0) (5,760.0) (27,430.0) (75,745.0) 31.1

Total 6 68 63 7 138 27 2 18 i0 57 195

(59,581.0) (142,674.0) (2,58n0.0) (204,835.0) (12,900.0) (500.0) (17,650.0) (7,560.0) (38,610.0) (243,445.0)

% of Loan Volume 24.5 58.6 1.1 84.1 5.3 )0, 7.3 3.1 15.9

1/ Number of louants and total. amtiotulnt of thIese loais In parnthetil s.

2/ The purposes are the officially stated1 purposes andtt do niot niecessarily correspond to acttuiil usea of fundEls.

3/ 11 loone huere "intnrcet" Information itI not otvinltibie litve heen left out of the talble.

t I

Ul

Appendix Table 1,3

AkolaDistribution of Loan Transactions by Main PuLrpose and Source 1/

PurposesCurrent Food Residence Tota]

Sources Crop Loans Agriculture All Cotnsuoption/ Medical & Consumer Non--Agri- X of Loan& Fodder Investment Bunding Agriculture Clothing Education Marriage Durables Other culttural Grand Total Voltumes

Governiment 2/ 12 6 18 1 1 19(21,982.7) (19,446.0) (41,428.7) (480.0) (480.0) (41,908.7) 21.6

Commercial Banks 2/ I J 2 2(3,000.0) (900.0) (3,900.0) (3,900.0) 2.0

Cooperative 2/ 48 10 58 2 1 3 61(78,734.55) (35,521.7) (114,256.25) (3,098.5) (530.0) (3,628.5) (117,884.75) 60.7

All Official Sources 61 17 71 2 1 4 82(103,717.25) (55,867.7) (159,584.95) (3,098.5) (530.0) (4,108.5) (163,693.45) 86.3

Moneylenders 2 2 6 4 10 12(2,300.0) (2,300.0) (1,720.0) (3,586.0) (5,306.0) (7,606.0) 3.9

Relatives 2 2 7 3 10 12(1o,00.0) ( I ,110.n) (4,200.0) (2,050.00) (6,250.0) (7,250.0) 3.7

Frieends 2 2 2(200.0) (200.0) (200.0)

Private Shops 35 3 38 38(6,084.0) (2,950.0) (9,034.0) (9,034.0) 4.7

Employers 1 2 3 3(400.0) (300.0) (700.0) (700.0) .4

Tenants

Otlhers 2 2 13 1 5 19 21(1,075.0) (1,075.0) (3,500.0) (12.0) (1,200.0) (4,712.0) (5,787.0) 3.0

All Informal Sources 4 2 6 64 1 17 82 88(3,375.0) (1,000.0) (4,375.0) (16,104.0) (12.0) (10,086.0) (26,202.0) (30,577.0)

Total 65 19 84 66 1 18 86 170(107,092.25) (56,867.7) (163,959.95) (19,202.3) (12.0) (10,616.0) (30,310.5) (194,270.45)

% of Loan Volume 55.1 29.3 84.4 9.9 0.0 5.5 15.6

1/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarily corresponid to actual uses of fuinds.3/ 13 loans where "source" information is not available have been left out O1 the table.

70

Appendix Table 2.e1

MahboobnagarDistribution of Loan Transactions bv Sources and Loan Size 1/

Loan Size

Sources 0-500 501-1000 1001-5000 Above 5000 Total % of Loan Volumes

Government 2/

Commercial Banks 2/ 2 2 4)6,600.0) (13,300.0) (19,900.0) 9-6

Cooperative 2/ 1 3 2 6(1,000.0) (7,200.0) (47,000.0) (55,200.0) 26.6

All Official Sources 1 5 4 10(1,000.0) (13,800.0) (60,300.0) (75,100.0) 36.2

Source 0-500 501-1000 1001-5000 Above 5000 Total

Moneylenders 37 24 19 1 81(8,486.7) (21,502.0) (52,200.0) (11,000.0) (93,188.7) 45.0

Relatives

Friends 1 1(200.0) (200.0) 0.0

Private Shops 3 1 4(740.0) (1,500.0) (2,240.0) 1.1

Employers 12 5 2 19(3,640.0) (3,700.0) (3,250.0) (10,590.0) 5.1

Tenants 1 1(190.0) (190.0) 0.0

Others 1 1 1 1 4(400.0) (600.0) (1,800.0) (23,000.0) (25,800.0) 12.4

All Informal Sources 55 30 23 2 110(13,656.7) (25,802.0) (58,750.0) (34,000.0) (132,208.7) 63.8

Total 3/ 55 31 28 6 120(13,656.7) (26,802.0) (72,550.0) (94,300.0) (207,308.7)

% of Loarn Volumes 66 12.9 35.0 45.5

1/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.

3/ 12 loans where "source" information is not available have been left out of the table.

- 71 -

Appendix Table 2.2

SholapurDistribution of Loan Transactions by Sources and Loan Size 1/

Loan Size

Sources 0-500 501-1000 1001-5000 Above 5000 Total % of Loan Volumes

Government 2/ 36 7 8 51(8,280.0) (5,703.0) (18,613.0) (32,596.0) 13.4

Commercial Banks 2/ 1 2 3(500.0) (1,820.0) (2,320.0) 1.0

Cooperative 2/ 20 22 35 3 80(7,108.0) (19,875.0) (85,801.0) (20,000.0) (132,784.0) 54.5

All Official Sources 57 31 43 3 134(15,888.0) (27,398.0) (104,414.0) (20,000.0) (167,700.0) 68.9

Moneylenders 10 5 3 18(4,000.0) (3,760.0) (8,600.0) (16,360.0) 6.7

Relatives 15 5 4 24(3,985.0) (4,250.0) (5,500.0) (13,735.0) 5.6

Friends 8 3 4 1 16(1,450.0) (1,800.0) (8,000.0) (33,000.0) (44,250.0) 18.2

Private Shops

Employers 2 2(400.0) (400.0) 0.2

Tenants

Others 1 1(1,000.0) (1,000.0) 0.7

All Informal Sources 35 14 11 1 61(9,835.0) (10,810.0) (22,100.0) (33,000.0) (75,745.0) 31.1

Total 3/ 92 45 54 4 195(25,723.0) (38,208.0) (126,514.0) (53,000.0) (243,445.0)

% of Loan Volumes 10.6 15.7 52.0 21.8

1/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.

3/ 11 loans where "source" information is not available have been left out of the table.

72 -

Appendix Table 2.3

AkolaDistribution of Loan Transactions by Sources and Loan Size 1/

Loan SizeSources 0-500 501-1000 1001-5000 Above 5000 Tutal

Government 2/ 7 3 5 4 19(2,054.7) (1,860.0) (10,154zO) (27,840.0) (41,908.7)

Commercial Banks 2/ 1 1 2(900.0) (300-0) (3,900.0)

Cooperative 2/ 17 19 20 5 61(4,727.85) (13,212.4) (57,115.5) (42,829.0) (117,884.75)

All Official Sources 24 23 26 9 82(6,782.55) (15,972.4) (70,269.5) (7J,669.0) (163,693.45)

Moneylenders 8 2 2 12

(1,406.0) (12,000.0) (5,000.0) (7,606.0)

Relatives 9 1 2 12

Friends 2 2

Private Shops 36 1 1 38

(6,384.0) (650.0) (2,000.0) (9,034.0)

Employers 3 3(700.0) (700.0)

Tenants

others 18 2 1 21(24112.0) (1,675.0) (2,000.0) (5,787.0)

All Informal Sources 76 6 6 88(13,152.0) (4,425.0) (13,000.0) (30,577.0)

Total 3/ 100 29 32 9 170(19,934.55) (20,397.3) (83,269.5) (70,669.0) (194,270.45)

% of Loan Volumes 10.3 10.5 42.9 36.4

1/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.

3/ 13 loans where "source" information is not available have been left out of the table.

Appendix Table 3.1

MahboohnagarDistribtition of Loan Tranistictions by Sources and Interest Rates I/

Interest Rate ZSources None Up to 5 5 to 15 15 to 30 30 to 50 Above 50 Total . of Loan Volumes

Government 2/

Commercial Banks 2/ 4 4(19,900.0) (19,900.0) 9.6

Cooperative 2/ 1 4 1 6(11,000.0) (42,200.0) (2,000.0) (55,200.0) 26.6

All Official Sources 1 8 1 10(11,000.0) (62,100.0) (2,000.0) (75,100.0) 36.2

Moneylenders 64 1 16 81(88,558.0) (800.0) (3,830.7) (93,188.7) 45.0

Relatives

Friends 1 1(200.0) (200.0) 0.0

Private Shops 2 1 1 4(2,000.0) (140.0) (100.0) (2,240.0) 1.1

Employers 6 3 10 19(3,450.0) (1,200.0) (10,590.0) 5.1

Tenants 11 1(190.0) (190.0) 0.0

Others 4 4(25,800.0) (25,800.0) 12.4

All Informal Sources 14 3 75 1 17 110(31,640.0) (1,220.0) (94,618.0) (800.0) (3,930.7) (132,208.7) 63.8

Total 3/ 14 1 11 76 1 17 120(31,640.0) (11,000.0) (63,320.0) (96,618.0) (800.0) (3,930.7) (207,308.7)

% of Loan Volumes 15.3 5.3 30.5 46.6 0.4 1.9

1/ Number of loans and toral amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.3/ 12 loans where "source" information is not available have been left out of the table.

Appenidix Table 3.2

SholapurDistribution of Loan Transactions by Sources and Interest Rates 1/

Tnterest Rate Z

Sources None Up to 5 5 to 15 15 to 30 30 to 50 Above 50 Not Available Total

Governtment 2 50 1 51

(32,326.0) (270.0) (32,596.0)

Comaiercial Banks 2/ 3 3

(2,320.0) (2,320.0)

Coolperative 2J 80 80

(132,784.0) (132,784.0)

All Official Sources 133 1 134

(167,430.0) (270.0) (167,700.0)

Nioneylenders 1 6 8 3 18

(400.0) (4,300.0) (8,300.0) (3,360.0) (16,360.0)

Relatives 23 1 24

(12,885.0) (850.0) (13,735.0)

Friends 16 16

(44,250.0) (44,250.0)

Private Shops

Emiiployers 2 2

(40u .11) (400.0)

Tenants

otlhers 1(1,000.0) (1,000.0)

All Informal Sources 42 1 6 8 4 61

(58,535.0) (400.0) (4,300.0) (8,300.0) (4,210.0) (75,745.0)

Total-3/ 42 133 1 6 8 5 195

(58,535.0) (167,430.0) (400.0) (4,300.0) (8,300.0) (4,480.0) (242,445.0)

% of Loan Volume 27.0 68.8 0.2 1.8 3.7 1.8

1/ Ntimber of loans and total amount of these loanis In parenthesis.

2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.

3/ 11 loans where "source" information Is not availablE. have been left out of the table.

Appendix Table 3.3

AkolaliAstribuition of Loann Transactions by Sources anid Interest Rates I/

Interest Rate XSources None Up to 5 5 to 15 15 to 30 30 to 50 Above 50 Total

Government 2/ 19 19(41,908.7) (41,908.7)

Commercial Banks 2/ 2 2(3,900.0) (3,900.0)

Cooperative 2/ 61 61(117,884.75) (117,884.75)

All Official Sources 82 82(163,693.45) (163,693.45)

Moneylenders 5 6 1 12(6,450.0) (1,006.0) (150.0) (7,606.0)

Relatives 9 3 12(6,600.0) (650.0) (7,250.0)

Friends 2 2(200.0) (200.0

Privace Shops 27 5 4 2 38(4,195.0) (1,650.0) (850.0) (2,339.0) (9,034.0)

Emiiployers 3 3(700.0)

(700.0)

Tenants

Ocliers 9 4 3 5 21(917.0) (1,200.0) (475.0) (3,195.0) (5,787.0)

All Informal Sources 50 14 16 8 88(12,612.0) (9,300.0) (2,981.0) (5,684.0) (30,577.0)

Total 3/ 50 82 14 16 8 170(12,612.0) (163,693.45) (9,300.0) (2,981.0) (5,684.0) (194,270.45)

% of Loan Volumes 6.5 84.3 4.8 1.5 2.9

1/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.31 13 loans where "source" information is not available have been left out of the table.

- 76 -

Appendix Table 4.1

MahboobnagarDistribution of Loan Transactions by Sources and Collateral 1/

Collateral

None Land Third Party Labor Credit

Sources Guarantee Link Other Total

Government 2/

Commercial Banks 2/ 4 4

(19 ,900.O) (19,900.0)

Cooperative 2/ 5 1 6

(44,200.0) (11,000.0) (55,200.0)

.All Official Sources 9 1 10

(64,100.0) (11,000.0) (75,100.0)

.Moneylenders 79 1 1 81

(92,588.7) (400.0) (200.0) (93,188.7)

Relatives

Friends 1 1

(200.0) (200.0)

Private Shops 4 4

(2,240.0) (2,240.0)

Employers 1 12 6 19

(400.0) (6,740.0) (3,450.0) (10,590.0)

Tenants 1 1

(190.0) (190.0)

Others 4 4

(25,800.0) (25,800.0)

All Informal Sources 86 13 11 110

(95,618.7) (7,140.0) (29,450.0) (132,208.7)

Total 3/ 86 9 1 13 11 120

(95,618.7) (64,100.0) (11,000.0) (7,140.0) (29,450.0) (207,308.7)

% of Loan Volumes 46.1 30.9 5.3 3.7 11.2

1/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially scated purposes and do not necessarily correspond to actual uses of funds.

3/ 12 loans where "source" informacion is not available have been left out of the table.

- 77 -

Appendix Table 4.2

SholapurDistribution of Loan Transactions by Sources and Collateral 1/

CollateralNone Land Third Party Labor CreditSources Guarantee Link Other Total

Government 2/ 51 51(32,596.0) (32,596.0)

Commercial Banks 2/ 3 3(2,320.0) (2,320.0)Cooperative 2/ 10 70 80(11,300.0) (121,484.0) (132,784.0)

All Official Sources 10 124 134(11,300.0) (156,400.0) (167,700.0)

Moneylenders 11 5 1 1 18(6,400.0) (8,860.0) (500.0) (600.0) (16,360.0)

Relatives 24 24(13,735.0)

(13,735.0)

Friends 14 1 1 4/ 16(42,160.0) (90.0) (2,000.0) (44,250.0)

Private Shops

Employers 1 1 2(200.0) (200.0) (400.0)Tenants

Others 1 1(1,000.) (1,000,o)

All Informal Sources 49 8 2 2 61(62,295.0) (10,150.0) (700.0) (2,600.0) (75,745.0)

Total 3/ 59 132 2 2 195(73,595.0) (166,550.0) (700.0) (2,600.0) (243,445.0)

% of Loan Volumes 30.2 68.7 0.3 1.1

1/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.3/ 11 loans where "source" information is not available have been left out of the table.4/ This is the only loan with gold or jewelry as collateral.

Appendix Table 4.3

Akola

DisLrhultiton of Loain Tranistactions by Sources and Collateral I/

Co llatera&

None Land Third Party Labor Credit

Sources Guarantee Link Other Not Available Total

Governenent 2/ 2 17 19

(3,362.0) (38,546.7) (41,908.7)

Commercial Banks 2/ 1 1 2

(3,000.0) (900.0) (3,900.0)

Cooperative 2/ 1 12 4f 61

(530.0) (42,481.7) (74,513.05) (117,884.75)

All Official Sources 3 13 66 82

(3,892.0) (45,841.7) (113,959.75) (163,693.45)

Moneylenders 11 1 12

(5,606.0) (2,000.0) (7,606.0)

Relatives 10 2 12

(6,2500)M (1,0(10.0) (7,250.0)

Friends 2 2

(200.0) (200.0)

Private Shops 36 1 1 37

(8,184.0) (650.0) (200.0) (9,034.0)

Emplovers 3 3

(700.0) (700.0)

Tenants

Others 19 1 1 21

(5,412.00) (75.0) (300.0) (5,787.0)

All Informal Sources 78 1 2 5 1 1 88

(25,652.0) (2,000.0) (1,000.0) (1,425.0) (300.0) (200.0) (30,577.0)

Total 3/ 81 14 68 5 1 1 170

(32,544.0) (47,841.7) (114,959.75) (1,425.0) (300.0) (200.0) (194,270.45)

% of Loan Voluines 16.8 27.6 59.2 0.7 0.2 0.1 # 100.0

1/ Numllber of loans aad total amount of these loans in parenthesis.

2/ The purposes are thie officiallv stated purposes antd do not necessartly correspond to actual uses of funds.

/ 13 loans where "soturce'§ informationt is not avaiIEb?.e have been left out of the table.

Appendix Table 5.1

MahboobnagarDistribution of Loan Transactions by Sources and Default Status 1/

Default Status

Not In Default In Defatult In Default In Default

Sources Defaulted For 1 Or 2 For 3 To 5 For 6 To 10 For More Than Total

Years Years Years 10 Years

Government 2/

Commercial Banks 2/ 3 1 4

(16,400.0) (3,500.0) (19,900.0)

Cooperative 2/ 6 6

(55,200.0) (55,200.0)

All Official Sources 9 1 10

(71,600.0) (3,500.0) (75,100.0)

Mon.cylenders 81 81

(93,188.7) (93,188.7)

Relatives

Friends 1 1

(200.0) (200.0)

Private Shops 4 4

(2,240.0) (2,240.0)

Employers 16 2 1 19

(8,690.0) (1,400.0) (500.0) (10,590.0)

Tenants 1 1

(190.0) (190.0)

Others 4 4

(25,800.0) (25,800.0)

All Informal Sources 107 2 1 110

(130,308.7) (1,400.0) (500.0) (132,208.7)

Total 3/ 116 2 2 120

(201,908.7) (1,400.0) (4,000.0) (207.308.7)

% of Loan Volumes 97.7 0.7 1.9

1/ Number of loans and total amount of these loans in parenthesis.

2/ The purposes are the officially stated purposes and do not necessarily correspond to actual uses of funds.

3/ 12 loans where "source" information is not available have been left out of the table.

Appendix Table 5.2

SholapurDIsLributionl of L.oan Transactions by Sourr and Default Status 1/

Default StatusNot In Default In Default In Default In Default

Sources Defaulted rL 1 Or 2 For 3 To 5 For 6 To 10 For More Than Not Available TotalYears Years Years 10 Years

Governmenit 2/ 2 13 31 5 51(3,700.0) (5,734.0) (14,099.0) (9,063.0) (32,596,0)

Commercial Banks 2/ 2 1 30 l t700) (1,000.0) (2,320.0)

Cooperative 2/ 37 12 13 8 1 9 80(6j9,75&iOX) (17,941.0) (11,975.0) (12,713.0) (500.0) (19,900.0) (132,784.0)

All Official Sources 41 12 26 40 6 9 134(74,S75.0) (17,9'i9, ;C) (17,709.0) (27,812.0) (9,563.0) (19,900.0) (167,700.0)

tMoneylenders 4 3 11 18(8,660.0) (3;o20.0) (4,500.0) (16,360.0)

Relatives 20 3 1 24(10,460.0) '2,425.0) (850.0) (13,739.0)

Friends 14 1 1 16(42,160.0) (2.000.0) (90.0) (44X250.0)

Private Shops

Employers 2 2(400.0) (400.0)

Toeants

Others 1(1,000.0) (1,000.0)

All Informal Sources 41 7 1 12 61(62,680.0) (7,625.0) (90.0) (5,350.0) (75,745.0)

Total 3/ 82 19 26 41 6 21 195(137,455.0) (25,566.0) (17,709.0) (27,902.0) (9,563.0) (25,250.0) (243,445.fO)

% of Loan Volumes 56.5 10.5 7.3 11.5 3.9 10.7

I/ Number of loans and total amount of these loans in parenthesis.2/ The purposes are the officially stated purposes and do not necessarilv correspond to actual uses of funds.3/ 11 loans who;~re "source" information Is not available have been left out of the table,

Appendix Table 5.3

Akola

Distribution of Loan Transactions by Sources and Default Status 1/

Default Status

Not In Default In Default In Default In Default

Sources Defaulted For 1 Or 2 For 3 To 5 For 6 To 10 For More Than Not Available Total

Years Years Years 10 Years

Government 2/ 1 10 2 4 19

(306.0) (23,502.2) (2,100.0) (16,000.0) (41,908.2)

Commercial Banks 2/ 1 1 2

(3,0O0.0) (900.0) (3,900.0)

Cooperatlve 2/ 25 21 7 4 3 1 61

(34,117.6) (52,062.1) (15,926.6) (7,701.95) (4,077.0) (4,000.0) (117,885.25)

All Official Sources 26 21 8 14 5 6 71

(37,117.6) (52,062.1) (16,232.6) (31,204.15) (6,177.0) (20,900.0) (163,693.45)

Moneylenders 12 12

(7,606.0) (7,606.0)

Relatives 12 12

(7.250.0) (7,250.0)

Friend6 2 2

(200.0) (200.0)

Private Slhops 37 1 38

(8,784.0) (250.0) (9,034.0)

Employers 2 1 3

(500.0) (200.0) (700.0)

Tenants

Others 21 21

(5,787.0) (5,787.0)

All Informal Sources 86 1 1 88

(30,127.0) (250.0) (200.0) (30,577.0)

Total 3/ 112 22 8 14 1 170

(67,244.6) (53,312.1) (16,232.6) (31,204.15) (200.0) (194,270.45)

% of Loan Volumes 37.6 27.7 8.7 16.1 0.1 = 86.6

1/ Number of loans and total amount of these loans il parenthesis.

2/ The purposes are the officially stated purposes and do not necessarily corres and tG actual uses of funds.

31 13 loans where "source" information is not available have been left out of the table,

82 -

Ref erencr

Pranab K. Bardhan, and Ashok Rudra. "Interlinkage of land, labor and creditrelations: An analysis of village survey data in East India."Economic and Political Weekly, 1978 (ann. no.), 13, 367-284.

, and Ashok Rudra. "Terms and conditions of sharecroppingcontracts: An analysis of village data in India." Journal ofDevelopment Studies, 1980, 16, 287-302.

___ , and Ashok Rudra. Terms and conditions of labor contractsin agriculture 1979. Oxford Bulletin of Economics and Statistics,1981, 43, 89-111.

M.J. Bhende, "Credit Markets in the Semi-Arid Tropics of Rural South India.International Crops Research Institute for the Semi-Arid Tropics,"Economics Program Progress Report # 56, November 1983.

Hans P. Binswanger, Victor S. Doherty, T. Balaramaiah, M.J. Bhende, K.G.Kshirsagar, V.B. Rao and PS.S. Raju, Common Features and Contrastsin Labor Relations in the Semi-Arid Tropics of India in Binswanger,H.P. and Mark Rosenzweig eds., Contractual Arrangements, Employmentand Wages in Rural Labor Markets in Asia.

, and Rosenzweig, M.R., eds., Contractual Arrangements,Employment and Wages in Rural Labor Markets in Asia, New Haven: YaleUniversity Press, 1984a.

7 and Rosenzweig, M.R., "Contractual Arrangements, Employmentand Wages in Rural Labor Markets: A Critical Review," in Binswanger,H.P. and Rosenzweig, M.R., eds., Contractual Arrangements, Emploumentand Wages in Rural Labor Markets in Asia, New Haven: Yale UniversityPress, 1984b.

-___ s"Risk Aversion Collateral Requirements and the Markets forCredit and Insurance in Rural Areas, Chapter 4 of Hazell, Pomeradaand ValdEs (eds.) Crop Insurance for Agricultural Development Issuesand Experience. Baltimore, Johns Hopkins University Press, 1985.

, and Mark Rosanzweig, "Behavioral and Material Determinantsof Production Relations in Agriculture, Journal of DevelopmentStudies, forthcoming.

Jan C. Breman, "Seasonal migration and cooperative capitalism: The crushing ofcane and labor by the sugar factories of Bardoli, South Gujarat." inBinswanger, H.P. and Rosenzweig, M.R., eds. Contractural ArrangementsEmployment and Wages in Rural Labor Markets in Asia, New Haven: YaleUniversity Press, 1984.

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Esther Boserup, "The Conditions of Agricultural Growth," Chicago: George Allenand Unwim Ltd., 1965.

Avi Braverman, and T.N. Srinivasan, "Agrarian Reforms in Developing RuralEconomies Characterized by Interlinked Credit and Tenancy Markets,"in Binswanger, H.P. and Rosenzweig, M.R., eds. ContracturalArrangements Employment and Wages in Rural Labor Markets in Asia, NewHaven: Yale University Press, 1984.

Mead Cain, "Risk and Insurance: Perspective on Fertility and Agrarian Changein India and Bangladesh." Population and Development Review, No. 7(September 1981): 435-474.

Clifford Geertz, "The Rotating Credit Association: A Middle Rung inDevelopment" Economic Development and Cultural Change, Vol. 10, No.3, April 1962, 243.

Peter Hazell, Carlos Pomareda and Alberto Vald6s, Crop Insurance forAgricultural Development Issues and Experience. Baltimore JohnsHopkins University Press, 1985.

Gerald David Jaynes, "Economic theory and land tenure." in Binswanger, H.P.and Rosenzweig, M.R., eds. Contractural Arrangements Employment andWages in Rural Labor Markets in Asia, New Haven: Yale UniversityPress, 1984.

N.So Jodha, "Agricultural Tenancy in Semi-Arid Tropical. Parts of India, inBinswanger, Hans P. and Mark Rosenzweig, eds., ContractualArrangements, Employment and Wages in Rural Labor Markets in Asia,New Haven, Yale University Press, 1984.

, "Role of Credit in Farmer's Adjustment Against Risk in Arid andSemi-Arid Areas of India," Economic and Political Weekly Vol. 16,Nos. 42-43, October 17-24, 1981.

DoMoG. Newbery, and Stiglitz, J.E. Sharecropping, risk sharing and theimportant of imperfect information. In James A. Roumasset, Jean MarcBoussard,. and Inderjit Singh (Eds.), Risk, uncertainty, andagricultural development. College, Laguna, Philippines and New York:Southeast Asian Regional Center for Graduate Study and Research inAgriculture and Agricultural Development Council, 1979.

JePe Von Pischke, Dale W. Adams and Donald Gordoni, Use and Abuse of RuralFinancial Markets in Low-income countries, IBRD, 1981.

Joseph E. Stiglitz and A. Weiss, "Credit Rationing in Markets with ImperEectInformation, Part I," American Economic Review 71, June 1981.

Arvind Virmani, "The Nature of Credit Markets in Less Developed Countries: AFramework for Pclicy Analysis," Domestic Finance Study No. 71,Development Economics Department, World Bank, 1981.

- 84

Walker, T.S., R.P. Singh, M. Ashokan and H.P. Binswanger, "Fluctuations inIncome in Three Villages of India's Semi-Arid Tropics." ICRISAT,Economics Program, Progress Report # 57, December 1983.

Andrew Weiss, "Job queues and layoffs in labor markets with flexible wages."Journal of Political Economy, 1980, 88, 526-538.

MSCSSC:^^! ?APERSAG,R/Research Unit

Reoort No.: ARU 1Agricultural Mechanization: A Comparative Historical Persvective

by Hans P. Binswanger, October 30, 1982.

The Acquisition of Information and the Adoption of New Technologyby Gershon Feder and Roger Slade, September 1982.

Reoort No.: ARU 3Selecting Contact Farmers for Agricultural Extension: The Training and.Visit System in Haryana, India

by Gershon Feder and Roger Slade, August 1982.

Report No.: ARU 4The Impact of Attitudes Toward Risk on Agricultural Decisions in RuralIndia.by Hans P. Binswanger, Dayanacha Jha, T. Balaramaiah and Donald A. SillersMay 1982.

ReEort No.: ARU jBehavioral and Material Detertinants of Production Relations in Agricultureby Hans P. Binswanger and Mark R. Rosenzweig, June 1982, Revised 1 0/5/33.

Reoort No.: ARU 6The Demand for Food and Foodgrain Quality in India

by Hans P. Binswanger, Jai=e B. Quizon and Guruishri Swamy, November 1982.

Recort No.: AXR' 7Policy Implications of Research on Energy Intake and Activity Levels with

Reference co the Debate of che Energy Adequacy of Existing Diets inDevelopment Countriesby Shlomo Reutlinger, May 1983.

Report No.: ARU 8M£ore Ef7fective A.d tu the World's Poor and Hungrt;: A .Fresh Look at

United Staces Public Law 480, Title II Food Aidby Shlovo Reutcl. nger, June 1983.

Reoort No.: A.R' 9Faccor Gains and Losses in the Indian Semi-Arid Tropics:

A Didactic Aporoach to Modeling the Agricultural Sectorby Jaime B. Quizon and Hans P. Binswanger, Sepoc-ber 1.983, Revised Mav !.984.

Reoort NO.: ARU 10The Discribution of Income in India's Northern Wheat Region

by jaime B. Quizon, Hans P. Binswanger and Devendra Gupca, A.uus: 1993.Revised june L 984.Retort No.: AjLT 1i

Population Density, Farming Intensity, Patterns of Labor-Use and 4echan' zationby Prabhu L. Pingali and Hans ?. Binswanger, September 1983.

Renort No.: ARU 12The Nutritional Impact of Food Aid,: Criceria for the Selection of

Cost-Effective Foodsby Shlomo Reutlinger and Judit Kato'na-Apte, September 1983.

oiscussionl Papers (Cont'd.)

Revort No.: A.RU 13Project Food Aid and Equitable Growth: Income-Transfer Efficiency First!by Shlomo Reutlinger, August 1983.

Report So.: A.RU 14Nutritional. ImPact of Agricultural Proieects: A Conceptual Framework forModifying the Design and Implementation of Projects

by Shlomo Reutlinger, August 2, [983.

Report No4.: ARU 15Patterns of Agricultural Protection by Hans P. Sinswanger and Pasquale LeScandizzo, NIovember 15, 1983.

Report No.: A.RU 1 6Faccor Costs, Income and Supply Shares in rndian Agriculture

by Ranjan Pal and Jaime Quizon, December 1983.

Reoor-t No.: ARU 173ehavi3cal and haterial Determinants of Production Relations in Land Abundaat

Tropical Agriculcureby Hans P. Binswanger and John McrIntire, January 1984,

Re2ort 'No.: ARUT 18Tne Relation Between Farm Size and Far-m ?roductivity: The Role of Family

t.abor, Superv*ision and Credit Constraints*by Gershon Feder, December L983.

Reor: No. : .kRU' 9Ak Comparative Analyrsis Dr Some A:speccs of cnie Tralaing and Vtsitc Syscem ofAgrLculcural 7-xension i;n ndia

by Gershon .Feder and Roger Slade, February 1984.

'Report No. : AIRU 2 0Distributional Consequences of Alternative Food Policies in Indiaby Hans P. Binswanger and Jalme B. Quizon, August 31, 1984.

Report No.: ARU 21Income Distribucion in India: The Impact of Policies and Growth in the AgriculturalSector, by Jaime B: Quizon and Hans P. Binswanger. NTovember 1984.

Reporr No. : ARU 2 'Population Density and Agricultural Intensification: A Study of the Evolution ofTechnologies in Tropical Agriculture, by Prabhu L. Pingali and Hans P. 3inswanger,October 17, 1984.

Report No. : ArU 23The Evolution of Farmining Systems antd Agricultural Technology in Sub-Saharan Africa,by Hans P. Binswanger and Prabhu L. Pingali, October 1984.

Report No.: ARU 24Population Density and Farming Systems - The Changing Locus of Innovations andTechnical Change, by Prabhu L. Pingali and Hans P. Binswanger, October 1984.

Report To.: ARU 25

Thec Train ynd Visit erxte,ision System: An Analysis of Operations andEffects, by G. Feder, R.H. Slade and A.K. Sundaram, November 1984.

-3-

Reprt o.:ARUS 26rh Role Of Public Policy in the Diffusion of New Agricultural Technology,

by Gershon Feder and Roger Slade, October 1984.

Report No-: ARU 27Fertilizer Subsidies: A Review of Policy Issues with Special Emphasis

on Western Africa, by Haim Shalit and Hans P. Binswanger, November 1984.

Report No.: ARU 28From Land-Abundance to Land-Scarcity: The Effects of Population Growth

on Production Relations in Agrarian Economies, by Mark R. Rosenzweig,Hans P. Binswanger, and John McIntire, November 1984.

Report No.: ARU 29The Impact of Rural Electrification and Infrastructure on Agricultural

Changes in India, 1966-1980, by Douglas F. Barnes and' Hans P. Binswanger,December 1984.

Report No.: ARU 30Public Tractor Hire and Equipment Hire Schemes in Developing Countries

(with Special Emphasis on Africa). A study prepared by the OverseasDivision, National Institute of Agricultural Engineering (OD/NIAE), byP.J. Seager and R.S. Fieldson, November 1984.

Report No.: ARU 31Evaluating Research System Performance and Targeting Research in LandAbundant Areas of Sub-Saharan Africa, by Hans P. Binswanger, January 1985.

Report No.: ARU 32On the Provision of Extension Services in Third World Agriculture, byAlastair J. Fischer (Consultant), January 1985.

Report No.: ARU 33An Economic Appraisal of Withdrawing Fertilizer Subsidies in India, by

Jaime B. Quizon, April 1985.

Report No.: ARU 34The Impact of Agricultural Extension: A Case Study of the Training and VisitMethod (T&V) in Haryana, India, Gershon Feder, Lawrence J. Lau andRoger H. Slade, March 1985.

Report No.: ARU 35Managing Water Managers: Deterring Expropriation, or, Equity as a Control

Mechanism, by Robert Wade, April 1985.

Report No.: ARU 36Common Property Resource Management in South Indian Villages, by Robert

Wade, April 1985.

Report No.: ARU 37On the Sociology of Irrigation: How de we Know the Truth about Canal Per±ormance?by Robert Wade, May 1985.

Report No.: ARU 38Some Organiizations concerned with Animal Traction Research and Develbpment in Sub-

Saharan Africa, by Paul Starkey, April 1985.

-4

Report No.: ARU 39The Economic Consequences of an Open Trade Policy for Rice in India,

by Jaime Quizon and James Barbieri, June 1985.

Report No.: ARU 40Agricultural Mechanization and the Evolution of Farming Systems in

Sub-Saharan Africa, by Prabhu L. Pingali, Yves Bigot and Hans P. Binswanger,May 1, 1985.

Report No.: ARU 41Eastasian Financial Systems as a Challenge to Economics: The Advantages

of 'Rigidity', with particular reference to Taiwan, by Robert Wade,June 1985.

Report No.: ARU 42Education, Experience and Imperfect Processing of Information in the Adoptionof Innovations, by Alastair J. Fischer, June 1985.

Report No.: ARU 43A Review of the Literature on Land Tenure Systems in Sub-Saharan Africa, byRaymond Noronha, July 19, 1985.

Report No.: ARU 44Policy Options for Food Security, by Shlomo Reutlinger, July 1985.

Report No.: ARU 45Credit Markets in Rural South India: Theoretical issues and Empirical Analysis,by Hans Binswanger, Balaramaiah, V. Bashkar Rao, M.J. Bhende and K.Ve Kashirsagar,July 1985.