Institute for Social and Economic Change
Working Paper: 304
Identifying Credit Constrained Farmers: An Alternative Approach
In this paper, we offer an alternative methodology to detect credit constrained households among farmers and seek to identify the determinants of the same. In order to detect credit constrained households we use the marginal approach to arrive at the optimal expenditure requirement for production for each household, and if expenditure of a household is found less than the optimal level , we consider that household as credit constrained. After classifying a household as constrained or otherwise, the paper then seeks to identify the determinants by undertaking a probit regression analysis. Interestingly, the empirical exercise shows that the likelihood of being constrained is higher for a person better endowed in terms of level of education and economic resources. Indeed the optimal level of output per unit of land for a better endowed person is much higher due to his having access to cheaper formal sector loan and thereby facing lower marginal cost of production. This observation is also valid for the higher social category of households (general category) vis-a-vis other classes. Thus, differences in sources of loan make significant difference in the level of demand for credit and in turn the rationing faced by the households.