Extent of Credit Rationing and its Determinants: Micro-empirical Evidence from Rural West Bengal, India

Credit rationing is an inherent characteristic of institutional credit market. In the context of credit rationing in institutional credit market, non-institutional credit market performs a market clearing role as the excess demand in formal credit market spill-over to informal credit market and hence raise the cost of loanable funds there. In this backdrop, this paper attempts to measure the extent of credit rationing of the farmer households by using micro empirical evidences from rural West Bengal. In addition, the study employs sequential choice model in the first stage to analyze the decision of a borrower for applying formal credit and the possibility of being credit rationed by the institutional lender in second stage. Empirical results revealed that households endowed with large land holding and greater work force participation rate in agriculture are more likely to apply formal credit. On the other hand, credit-worthiness and education level of the borrowers significantly influences lenders’ decision in rationing credit.