Credit rationing in rural credit markets of India

This article analyses the prevalent situation of the formal Financial Institutions (FIs) in rural India using data from National Sample Survey 54th Round (January–June, 1998). We use sample selectivity model to examine the sanction of the loan by the FIs as a two-stage process. We model the choice of the household's credit requirement using an unordered choice model, namely, a multinomial logit model. Our results reveal that the rural households are considerably credit constrained. The households who do not have an account in a FI have a lower chance of obtaining the loan and households who are credit constrained have relatively lower land holding and they do not possess livestock. Households who borrow for nonfarm purpose exhibit a lower chance of obtaining credit compared to those households who borrow for farm business. Village level infrastructure plays an important role in determining the credit rationing behaviour in rural India.