Determinants of access to and intensity of formal credit: evidence from a survey of rural households in eastern India

Abstract

This paper aims to analyse the correlates of choice of source of credit and amount of institutional finance from survey of rural households in eastern India. The study uses primary data of 2,641 rural households across Bihar, eastern Uttar Pradesh, and Jharkhand. Cragg's Double hurdle model, which accounts for endogeneity between the amount of formal finance borrowed and access of households to formal credit, is used to simultaneously identify the correlates of access and amount of formal credit. The results indicate that in eastern India, as much as 52% of households lack access to any type of loan, and the credit borrowed per household is Rs. 69,477, which is two-thirds of the national average of Rs. 103,457. The results of the exponential double hurdle model indicate that households with little land and education and belonging to disadvantaged social strata lack access to formal credit. Having a bank branch in the village or nearby distance is found to increase access and the amount borrowed.