This document summarizes a presentation on the impact of institutional versus non-institutional credit on farmers' welfare in India. It provides background on agricultural credit policy in India and outlines the objectives, data, methodology, key findings and conclusions of the study. The study finds that farmers with larger landholdings, higher education levels, and connections to knowledge institutions like agricultural universities have greater access to formal credit. It also finds that access to institutional credit has a positive impact on farm income and household consumption expenditures, indicating improved welfare.

1. Institutional vs Non-institutional Credit to Agricultural
Households in India:
Impact on Farmers' Welfare
Anjani Kumar
99th Annual Conference
Indian Economic Association
27-29 December 2016
Tirupati, Andhra Pradesh
India

2. Outline of the presentation
 Background
 Data
 Methodology
 Findings
 Conclusions

3. Background
 Credit plays a crucial role in agricultural development
 enables farmers to undertake new investments and/or adopt new
technologies.
 access to credit can enhance the risk bearing ability of the farmers and
support them invest in a little risky ventures with higher potential returns
 act as a catalyst to break the vicious circle of poverty in rural areas
 Agricultural credit policy in India
 improve farmers’ access to institutional credit and reduce their dependence
on informal credit
 ratio of agricultural GDP increased from 10% in 1999-00 to 38% in 2012-13
 Accounts for 85% of the purchased inputs in the agriculture and allied
sectors
 Major milestones of the rural credit before economic reforms include
 acceptance of the Rural Credit Survey Committee’s Report (1954),
 nationalization of the large commercial banks (1969 and 1980),
 establishment of Regional Rural Banks (1975) and
 the National Bank for Agriculture and Rural Development in 1982

4. Contd…
 After financial reforms in India, the milestones include
 Special agriculture credit plan (1994-95)
 Kisan credit cards (1998-99)
 Doubling agricultural credit (2004)
 Agricultural debt waiver and debt relief scheme (2008)
 Interest subvention scheme (2010-11)
 Jan Dhan Yojana (2014)
 Other measures to strengthen formal credit programs in India
 Lead bank scheme
 Direct lending for priority sector
 Banking sector’s linkage with the government sponsored programs
 Differential rate of interest scheme
 Service area approach
 Self-help group banks linkage programs
 Special agricultural credit plans
 Rural infrastructure development fund

5. Contd..
Access
to
Formal
Credit
Agricultural
Productivity
Household
Income
Source: Binswanger and Khandker, 1995; Carter 1989; Carter and Weibe 1990; Feder et al 1990; Pitt and Khandker, 1996, 1998; Khandker and
Farooqui 2003; Awotide et al 2015; Narayanan 2016

6. Objective
 To understand and analyze
 Characteristics of agricultural credit markets in India
 Characteristics of institutional and non-institutional borrowers
 Determinants of access to formal credit.
 The impact of institutional credit on agricultural households’
welfare in India
 Using unit level data from nationally representative sample of farm
survey.
 Net farm income and household consumption expenditure were taken
as a proxies for measuring agricultural households’ welfare

7. Data
 Used “Situation Assessment Survey of Agricultural Households” carried out by
the National Sample Survey Organization (NSSO) in 2013
 4529 villages spread across the country
 35200 farming households
 Period; Agricultural year 2012-13
 Comprehensive information on
 socio-economic well-being of agricultural households,
 consumption expenditure,
 income from productive assets,
 borrowing, lending and indebtedness,
 their farming practices and preferences,
 resource availability,
 receipts and expenses of household’s farm and non-farm businesses,
 their awareness of technological developments and
 access to modern technology in the field of agriculture

8. Methodology
 Binary Logistic Regression
 Determinants of farmers’ access to formal credit
 𝐘 = 𝐥𝐧
𝐩
𝟏−𝐩
= 𝛃 𝟎 + 𝛃𝐢 𝐗 𝐢
Where;
 p represents the probability that the farmer takes formal
credit
 βs are the regression coefficients estimated by the maximum
likelihood method
 Xs represent the explanatory variables and include several
socio-economic and demographic characteristics of the
farm households

9. Contd…
 Instrumental variable 2SLS
 assess the impact of formal credit on farmers’ profits
 𝝅𝒊 = 𝜶 + 𝜹𝒅𝒊 + 𝜸𝑿𝒊 + 𝜺𝒊
Where;
 𝝅𝒊 is net profit per ha received by a farm household from farming
 𝑑𝑖 is a dummy variable (= 1 if the farmer takes formal credit and 0 otherwise)
 𝑋𝑖 is a vector of observable farm and operator characteristics
 𝜀𝑖 is an error term
 Assumptions
 Estimation of the above equation using simple ordinary least squares (OLS) may result in
biased estimates.
 unobserved factors could be guiding farmers’ decision to access the formal credit.
 Thus, 𝒅𝒊, the variable representing farmer’s access to formal credit, is likely to be
endogenous and could be correlated with the error term, 𝜺𝒊.
 Conducted Hausman’s test for endogeneity and found access to formal credit to be endogenous
 Proportion of farmers availing institutional credit in a village as the instrumental variable

10. Status of banking infrastructure in India (Global vis-à-vis India)
0 10 20 30 40 50 60
Bangladesh
Brazil
China
France
Germany
India
Indonesia
Japan
Malaysia
Mexico
Nepal
Pakistan
Russian Federation
Sri Lanka
United Kingdom
United States
No. of bank branches per 100,000 adult population
Countries
Source: WDI 2015 (World Bank)

11. Structure of credit delivery mechanism in India
Source: WDI 2015 (World Bank)
 Institutional sources
 Government
 Cooperative banks
 Commercial banks
 Non-institutional sources
 Money lenders
 Employer
 Shopkeepers/traders
 Relatives/friends

12. Share of institutional credit in rural borrowings in India (1951-
2013)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
1951 1961 1971 1981 1991 2003 2013
8.8
17.3
29.2
61.2
55.7 57.1 60.3
Percent
Year
Source: AIRCS (RBI); AIDIS (NSSO)

13. International Food Policy Research Institute
Amount of borrowings in India:
1992, 2003 and 2013
Average amount of borrowing
(Rs/ha at 1993-94 prices)
980
3356
4850
0
1000
2000
3000
4000
5000
6000
1992 2003 2013

14. International Food Policy Research Institute
Equity in disbursement of institutional credit in India, 2003
and 2013
Source: NSS, GoI
0.72
0.44
0.98
0.84
0.49
1.13
0
0.2
0.4
0.6
0.8
1
1.2
Landless, Marginal and
Smallholders
SC & STs OBCs'
Ratio of weaker sections in institutional credit and households
2003 2013

15. Distribution of loans by sources (%)
64%
36%
Formal Sources
Informal Sources
Formal Sources Informal Sources
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Government Co-operative Society Bank
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Employer or
Landlord
Agricultural
Professional
or Money
Lender
Shopkeeper Relatives or
Friends
Others

16. Farmers’ access to credit from formal and
informal sectors, 2012-13
Distribution of HHs by borrowing (%) Share of formal and informal credit in
borrowing households (%)
14.8
24.2
30.0
39.1
22.8
21.7
14.2
11.6
8.9
16.2
8.9
13.3
17.0
23.6
13.1
54.7
48.3
41.5
28.5
47.9
0.0
10.0
20.0
30.0
40.0
50.0
60.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Marginal Small Medium Large All
Formal sources Informal sources
Both simultaneously Non-Borrower
55.0
64.3
67.1
74.9
63.6
45.1
35.7
32.9
25.1
36.4
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Marginal Small Medium Large All
Formal Credit Informal Credit

17. Distribution of borrowers households by
operational holding (%)
Share of HHs Share of Non-borrower
39.9
30.5
22.8
6.8
45.5
30.8
19.7
4.1
Marginal
Small
Medium
Large
Source of Borrowing Share in Credit
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Marginal Small Medium Large
Formal Credit Informal Credit Both Simultaneously
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Marginal Small Medium Large
Formal Credit Informal Credit

18. General characteristics of institutional and
non-institutional borrower
Particular Institutional Non-institutional Particular Institutional Non-institutional
Socio-demographic variables Structure of households by farm categories (%)
Age (Years) 51.1 46.9 Marginal 25.9 41.6
Family size (No.) 5.2 5.2 Small 32.5 28.6
Land size (Ha) 1.7 0.8 Medium 30 22.2
Per Capita Monthly Expenditure (Rs) 1603.7 1298.3 Large 11.7 7.6
Male headed households (%) 93.8 91 Principal source of household income (%)
% received formal training in agriculture 3.7 1.9 Agricultural Income 79.2 74.8
Social structure by caste (%) Non-Agr. Income 17.4 22.4
Schedule tribe 8.6 13.1 Pension 1.3 0.5
Schedule caste 12.8 19.1 Remittance 1.7 2
Other backward caste 46.1 47.2 Awareness and access to social safety nets (%)
General caste 32.2 20.7
Minimum Support Price
Awareness
30.6 22.3
Social structure by religion (%) Having MGNREGA Job Card 93.1 90.7
Hindu 88.4 87.2 Have PDS Ration Card 37.4 51.6
Muslim 6.1 9.7 Source of Technical Advice
Christian 1.8 1.1 Extension Agent 19.2 17.3
Other 3.3 1.8 KVK & SAU 8.5 5
Education level of the head of household (%) Pvt Commercial Agents 8.1 8.2
Illiterate 30.1 49.4 Progressive Farmer 20.7 22.3
Primary 27.9 24.8
Radio / TV / Newspaper /
Internet
28.8 22.7
Middle 17.3 13.6 NGO 1.3 0.8
Secondary 12.2 7.6
Higher secondary & above 12.4 4.7

19. Determinants of access to institutional credit
Significant variables dy/dx SE
Log of age of the household head 0.192*** (0.0134)
Middle (Yes = 1, otherwise = 0) 0.0876*** (0.0129)
Higher Secondary (Yes = 1, otherwise = 0) 0.138*** (0.0099)
Graduate and above (Yes = 1, otherwise = 0) 0.199*** (0.0227)
Schedule Tribe (Yes = 1, otherwise = 0) 0.0341* (0.0189)
OBC (Yes = 1, otherwise = 0) 0.0321** (0.0155)
Other Caste (Yes = 1, otherwise = 0) 0.0275* (0.0150)
Log of Per Capita Monthly Expenditure (Rs) 0.0668*** (0.0126)
Small (Yes = 1, otherwise = 0) 0.100*** (0.0110)
Medium (Yes = 1, otherwise = 0) 0.126*** (0.0138)
Large (Yes = 1, otherwise = 0) 0.123*** (0.0208)
MGNREGA Job Card (Yes = 1, otherwise = 0) -0.0778*** (0.0130)
Have Ration Card (Yes = 1, otherwise = 0) 0.0556*** (0.0178)
Extension Agent (Yes = 1, otherwise = 0) -0.0389** (0.0178)
KVK & SAU (Yes = 1, otherwise = 0) 0.0561*** (0.0174)
Pvt Commercial Agents (Yes = 1, otherwise = 0) -0.0284 (0.0244)
Progressive Farmer (Yes = 1, otherwise = 0) -0.0444*** (0.0141)
Radio / TV / Newspaper / Internet (Yes = 1, otherwise = 0) 0.0105 (0.0135)
NGO (Yes = 1, otherwise = 0) 0.0687* (0.0389)
Minimum Support Price Awareness (Yes =1, otherwise = 0) 0.0254* (0.0141)
Constant -6.534***
Observations 16583
District fixed effect Yes
Log pseudo-likelihood -10588.192

20. Average return of net farm income and
household consumption expenditure
Net farm income
(Rs/ha)
Consumption expenditure
(Rs/month/person)
0
10,000
20,000
30,000
40,000
50,000
Marginal Small Medium Large All
0
500
1,000
1,500
2,000
Marginal Small Medium Large All
Formal Borrower
Informal Borrower

21. Impact of institutional credit on net farm
income
Significant Variables Coefficient Standard Error
Institutional Credit (Yes = 1, otherwise = 0) 0.171*** (0.0456)
Log of household size 0.387*** (0.0307)
Gender (Male = 1, otherwise =0) 0.112*** (0.0361)
Graduate and above (Yes = 1, otherwise = 0) 0.121*** (0.0371)
OBC (Yes = 1, otherwise = 0) 0.0814** (0.0369)
Other Caste (Yes = 1, otherwise = 0) 0.132*** (0.0379)
Others Religion (Yes = 1, otherwise = 0) 0.446*** (0.0567)
Agricultural Income (Yes = 1, otherwise = 0) 0.785*** (0.1420)
Log of Per Capita Monthly Expenditure (Rs) 0.378*** (0.0368)
Small landholding (Yes = 1, otherwise = 0) 0.707*** (0.0253)
Medium landholding (Yes = 1, otherwise = 0) 1.084*** (0.0295)
Large landholding (Yes = 1, otherwise = 0) 1.623*** (0.0480)
MGNREGA Job Card (Yes = 1, otherwise = 0) -0.0784*** (0.0290)
Private Commercial Agents Source (Yes = 1, otherwise = 0) 0.178*** (0.0607)
Radio / TV / Newspaper / Internet Source (Yes = 1, otherwise = 0) 0.0662* (0.0350)
NGO Source (Yes = 1, otherwise = 0) 0.258** (0.1120)
MSP Awareness (Yes = 1, otherwise = 0) 0.246*** (0.0241)
Share of food crop 0.570*** (0.0320)
Share of high value crops 0.897*** (0.0338)
Share of oilseeds 0.383*** (0.0524)
Share of other crops (Non-food) 0.348*** (0.0443)
Proportion of HHs availed institutional credit by village wise 0.956*** (0.0030)
Constant 5.366*** (0.3760)
Observations 16583
District Fixed Effect Yes
R-squared 0.528

22. Impact of institutional credit on household
consumption expenditure
Significant Variables Coefficient Standard Error
Institutional Credit (Yes = 1, otherwise = 0) 0.107*** (0.0239)
Log of age of the household head 0.195*** (0.0152)
Log of household size -0.482*** (0.0111)
Gender (Male = 1, otherwise =0) -0.0463*** (0.0162)
Middle School (Yes = 1, otherwise = 0) 0.0315*** (0.0120)
Higher Secondary School (Yes = 1, otherwise = 0) 0.124*** (0.0131)
Graduate and above (Yes = 1, otherwise = 0) 0.233*** (0.0217)
Schedule Tribe (Yes = 1, otherwise = 0) -0.0857*** (0.0285)
OBC (Yes = 1, otherwise = 0) 0.0584*** (0.0161)
Other Caste (Yes = 1, otherwise = 0) 0.0939*** (0.0161)
Muslim (Yes = 1, otherwise = 0) 0.137*** (0.0226)
Christian (Yes = 1, otherwise = 0) 0.269*** (0.0396)
Others Religion (Yes = 1, otherwise = 0) 0.450*** (0.0389)
Non-Agricultural Income (Yes = 1, otherwise = 0) 0.143* (0.0790)
Pension (Yes = 1, otherwise = 0) 0.249** (0.1110)
Remittance (Yes = 1, otherwise = 0) 0.212*** (0.0805)
Small landholding (Yes = 1, otherwise = 0) 0.0801*** (0.0123)
Medium landholding (Yes = 1, otherwise = 0) 0.173*** (0.0148)
Large landholding (Yes = 1, otherwise = 0) 0.311*** (0.0202)
MGNREGA Job Card (Yes = 1, otherwise = 0) -0.0640*** (0.0132)
Have Ration Card (Yes = 1, otherwise = 0) 0.137*** (0.0151)
Krishi Vigyan Kendra & SAU Source (Yes = 1, otherwise = 0) 0.111*** (0.0246)
Private Commercial Agents Source (Yes = 1, otherwise = 0) 0.0503* (0.0266)
Radio / TV / Newspaper / Internet Source (Yes = 1, otherwise = 0) 0.0735*** (0.0092)
MSP Awareness (Yes = 1, otherwise = 0) 0.0832*** (0.0146)
Share of food crop -0.0505*** (0.0122)
Share of high value crops 0.133*** (0.0173)
Proportion of HHs availed institutional credit by village wise 0.957*** (0.0030)
Constant 6.694*** (0.0968)
Observations 16,583
District Fixed Effect Yes
R-squared 0.360

23. Hausman test for endogeneity for net farm
income and household consumption
expenditure
Variable
2SLS^
Coefficient Standard Error
Net farm income 0.171*** (0.0456)
Household consumption expenditure 0.107*** (0.0239)
Ehat$
for net farm income -0.118** (0.0464)
Ehat$
for household consumption expenditure -0.0843*** (0.0249)
Note: ^
Used Instrumental variable 2SLS method to investigate the role of institutional farm
credit on farm income and farm household consumption expenditures. Our instrumental
variable was “proportion of HHs availed institutional credit by village wise”; $
Hausman’s test for endogeneity for net farm income and household consumption
expenditure; Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

24. Conclusions
 Changing structure of rural credit market in India
 increase in the flow and share of institutional credit
 improvement in financial inclusion indicators
 land holding (marginal & small farmers)
 social group (SCs, STs and OBCs)
 Concerns in the rural credit delivery system
 disparity in disbursement of rural credit
 (states and social groups)
 persistence of informal agencies
 (charging very high interest rates)

25. Conclusions
 Access to Institutional credit has positive and
significant effect
 Farmers’ profits
 Farmers’ monthly expenditure
 Determinants for agricultural households’ access to
institutional credit
 age, education, caste affiliation, gender, occupation and assets
ownership

26. Way forward
 Flexible products and services
 Emphasis on financial literacy
 Simplification of lending procedure
 Unique identification number for households
 Convergence with extension and value chain development

27. THANK YOU