Need for Multipronged Policy Intervention in the Rural Credit Market: Nudging the Loss Averse Poor Borrower

Policy Intervention in the Rural Credit Market_PDF

Aranyak Saikia,Department of Economics, Delhi School of Economics, discusses the possibility of government intervention in improving access to institutional credit to borrowers in the rural credit market.

ABSTRACT

The paper explores the possibility of government intervention in improving access to institutional credit to borrowers in the rural credit market. It argues that a multipronged approach by the government, including allowing the poor to have zero balance accounts in banks, making it mandatory for banks to open branches in rural areas, reducing the paperwork to get a bank loan, providing insurance against crop failure and engaging volunteers, self-help groups and microfinance institutions in rural areas will go a long way in reducing capital market imperfections in the rural market. It analyses two such policy interventions by the Government of India, one in the 1970s and the other as recently as 2014, and argues for a need to implement both the policies concurrently to ensure success. Finally, it presents a model that provides a more rigorous mathematical foundation to these claims, and shows that a Pareto improvement can be made if the government nudges both the bank and the borrower in the right direction through the multipronged policies.

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