This paper tries to explain the curious fact that while at the national level the rural sector saves more than what it invests in itself in India, at the micro level, credit constraint is reported to be the main binding constraint on the activities in the rural economy. The explanation lies in the phenomenon of coordination failure. The public sector rural banks mobilize huge amounts of savings, but because of low rates of interest and high default rates, they do not lend in equal measure. Indeed, in India the public sector rural banks mobilize as savings three times the amount they lend as credit for investment. Raising the rate of interest at which the rural banks lend will not only raise the savings but also the investment in the rural sector. This is because at the current low level of rate of interest the rural credit market is severaly rationed. As the rate of interest is allowed to rise more banks become viable, banks increse their lending, more people are brought into the ambit of rural banks and away from the money lender. The poor especially benefit as this increased rate of interest is still only half the rate of interest that the moneylender charges.The policy suggestion is to allow the public sector rural banks to charge economically viable and market clearing rates of interest.
Atun Mishra is a senior lecturer in Shri Ram College of Commerce, University of Delhi. After a B. A. in Economics from University of Delhi in 1985 and M. A. in Economics from Jawahar Lal Nehru University, New Delhi in 1987, he has taught in the Department of Economics at Shri Ram College of Commerce. His Ph.D. thesis, submitted in May 2001 at the University of Reading, UK is titled "The emergence of entrepreneurship in the rural non-farm economy." The thesis explores the constraints on the emergence of entrepreneurship and identifies credit constraint as the binding one.
Journal of Microfinance
Issue and Volume
BYU ScholarsArchive Citation
Mishra, Mishra, Atul
"Coordination Failure in the Rural Credit Markets,"
Journal of Microfinance / ESR Review: Vol. 3
, Article 7.
Available at: http://scholarsarchive.byu.edu/esr/vol3/iss1/7