Essays in Development Economics in Reference to the Indian Credit Sector

Abstract

This dissertation comprises four empirical essays with the objective of understanding how to improve the delivery of credit to the poor in India by studying caste discrimination in credit, women’s empowerment, and impact of business training and repayment cycle on loan volumes, investment and incomes. The study uses primary data collected by myself from a village in the Indian state of Haryana from the clients of three microfinance institutions (MFIs), cooperative credit society and professional money lenders between 2015 and 2017 over three field visits; and from the India Human Development Survey (IHDS) data of 2005 and 2011-12.

In the first chapter, from the IHDS data, I examine whether the borrowers’ caste differences explain their differences in credit volumes. Using the Blinder–Oaxaca decomposition method, along with the Heckman procedure and the instrumental variable (IV) procedure to correct for selection and simultaneity bias, I find large credit differentials between upper castes and lower castes. I also show the evidence of caste discrimination (against the lower castes) and its increase between 2005 and 2012. I corroborate discrimination from the qualitative information collected in my field surveys.

Using the village survey data, my second chapter examines the impact of women’s empowerment on their creditworthiness, measured in terms of total amount of loans (taken over time). An empowerment index is constructed from the borrowers’ responses to questions regarding economic, social, interpersonal and political consciousness. I find that more empowered women secure greater loans. However, empowerment is likely to suffer from endogeneity, which is address by adopting the Instrumental Variable (IV) approach and using the sex of the borrower’s first child as an instrument for empowerment. The IV estimates show a positive impact of empowerment on the volume of loans. My explanation is that empowered women may have a higher ability to utilise loans for their businesses due to greater mobility, purchasing capacity, and economic independence. I study the robustness of this finding using the IHDS data.

In the third chapter, I evaluate the impact of a business training programme on women microfinance clients using the same village survey data and interviews. The treatment group is the borrowers from one MFI that received business training (by an exogenous rule), while the control group had no training. Using difference-in-difference, I find that training did increase their incomes albeit with a reduction in their investment. The ‘treated’ women realised that expanding business without necessary knowledge and skills was risky, and hence cut back on investment.

In the fourth chapter, I explore if flexibility in repayment would be beneficial for clients as opposed to traditional weekly repayments using the same primary data and in-depth interviews.
I find that the flexible and monthly repayment increased the level of investment as compared to the weekly schedule, but it did not raise income. The monthly repaying clients also had a higher loan amount and greater savings compared to the weekly paying clients.

In sum, the study covers some key issues of the poor borrowers, and it highlights the need for removing caste barriers, eliminating son preferences, training women entrepreneurs, and flexible and infrequent loan-repayment cycles.