Rural credit policies and the persistence of overdues in Indian agriculture

Many developing countries have adopted the supply-leading approach to the provision of rural credit. Despite the institutional and cultural diversity, many credit programs feature high default rates on agricultural loans. Recently, loan recovery was identified as the most important concern in Asia's rural financial markets. India is chosen as a case study because it is a particularly interesting example of a supply-driven financial system.;Previous studies on repayment performance have tended to concentrate on the attributes of the borrower. Recent work suggests that a more systematic analysis of institutions is required to formulate policies for improved loan recovery. The literature review indicates that no empirical studies have been conducted on the determinants of rural branch repayment rates in India.;The first objective of this dissertation is to analyze the effectiveness of the supply-side policies which govern commercial banks. A profit-maximizing framework is developed to analyze bank behavior. The framework is used to understand the evolution of the supply-side policies, and to evaluate the impact of recent policy initiatives on the credit delivery system. In addition, the historical development of the various credit agencies is presented.;The second objective is to empirically identify the determinants of agricultural loan repayment rates. An analytical framework is developed to identify the immediate factors which affect the branch repayment rate. The framework suggests that both agroclimatic and branch management parameters have a direct impact on loan recovery. An econometric model of loan repayment is specified and estimated using panel data.;The results of this study imply that there is a basic contradiction between the factors influencing branch repayment rates, and the supply-side policies governing bank behavior. Furthermore, the empirical evidence suggests that reforming the credit delivery system to improve repayment rates is limited by the physical and technological environment in which the branches are located.;Nonetheless, repayment rates are responsive to improvements in the credit delivery system. The findings of this dissertation indicate that there are several areas where the government and the banks can work jointly to improve the quality of rural lending.