Credit Constraints under Interaction of Supply Rationing and Demand Depression: Evidence from Rural Households in China

Parallel session 7. MicrofinancePresented at GLOBELICS 2009, 7th International Conference, 6-8 October, Dakar, Senegal.This paper analyzes the credit demand depression phenomenon resulting from long-term institutional supply rationing. Under the interaction between imperfect formal credit system and rural households’ risk aversion behavior, rural households will be discouraged to depress their credit demand or replace it with informal credit, which we call demand-side credit constraints. It find that about 33.72% of rural households are credit constrained in 1874 rural households, among which supply-side and demand-side credit constraints are respectively 17.13% and 18.14%. Estimation result shows that income, age, Rural Credit Cooperatives’ membership and the relationship with financial agencies have different impact on supply-side and demand-side credit constraints. In conclusion, it is more important to promote rural finance innovation and reverse negative credit anticipation than to increase credit supply