Individual borrowing and default behaviour in surplus and constrained credit environments: evidence from India

The present article studies borrowing behaviour between credit surplus and credit constrained environments in the context of microfinance, with respect to rural borrowing. Surplus and constrained environments get defined based on the number of the state-promoted self help groups (SHGs) in the district, and the volume of credit disbursed through these SHGs. Four hundred nineteen respondents comprising of farmers, off-farm workers, farm labourers, small businesspersons, SHG members and chit-fund or cooperative members were interviewed in the surplus district of Chittoor and the constrained district of Nalgonda in the erstwhile state of Andhra Pradesh. Statistical analyses comprising of OLS, binary logistic regression, ANOVA, t-test and chi-square tests show that surplus environments offer more adverse credit terms, especially for farmers and farm labourers. Further, surplus causes over-borrowing and defaults. Constraint propels planned repayments. Both the environments offer varying credit terms across trades. We also observe better lending terms when farmers and traders are among lenders in a constraint environment. Interlinking factor markets like land, labour and capital in a constrained environment leads to efficient outcomes, reinforcing the theory of New Institutional Economics