The Farmers' Loan Availability And The Optimization Of Loan Contract

The development of rural finance is very important to farmers and even to the whole country's economic development, but to a considerable extent, the general lack of qualified collateral in rural areas has caused financial repression. From the point of the substitution effect of reputation on the mortgage, and by learning from previous research results, we construct a theoretical model of maximizing social benefits to compare the effects of collateral and farmer's reputation to socially optimal loan size.And we use the questionnaire data of farmers'credit circumstance surveyed by People's Bank of China and National Bureau of Statistics in2007to test the results of the theoretical model by Logit model and OLS model. The main contents and conclusions are as follows:In the theoretical model, in the case of without considering the allocation of wealth, we can obtain our main conclusions by maximizing the expected profit of financial institution and loan applicants. The results of the theoretical model indicate that the optimal loan size under the mortgage mechanism is lower than the size under the reputation mechanism. This shows that the collateral requirements reduce the optima loan size of the society in general. The main reason of such results is that the assessment and realization of the collateral will lead to higher transaction costs. In addition, if borrower loses the investment opportunities due to his lack of collaterals, then overall net expected returns of the whole society will be lower. While, the reputation mechanism can raise the farmers'loan availability by reducing transaction costs and risks in the lending process.The empirical results of this article confirmed the conclusions of the aforementioned theoretical model. Firstly, the requirement of "collateral" has a positive effect on the loan size and term, but it has a negative effect to farmers'loan availability. Therefore, although the collateral has a positive effect on the reduction of information asymmetry between the lender and borrower, but it lowers the farmers'loan availability by the reason of transaction costs and the general lack of collateral. Then this loan mechanism cannot have an affirmative effect to resolve the problem of financing three rural problems. Secondly, the empirical results indicate that farmers'reputation is positively associated with the loan availability and the loan size, but has a negative correlation with the loan interest. And the reputation has a negative effect on the loan term, and such result can be seen as risk-averse behavior of financial institution.Based on the above analysis, we believed that we should pay more attention to the role of farmers'reputation in the design of loan contract, and we should fully consider the characteristics of the difference among different economical regions and characteristics of the financial needs of the rural households who have different income levels. And the relevant stakeholders should design the loan contract in a reasonable form. A mortgage loan contract which has lower interest, longer term and larger size should be used for productive purposes. On contrast, a credit loan contract which has higher interest, shorter term and smaller size could be used for meeting the liquidity and consuming purposes. These kinds of different components of the loan contracts will be suitable for different customer groups, and individual mortgage loan are appropriate for richer farmers, the credit loan contract suitable for low-income. Moreover, relaxing of market access, increasing the competition of the rural financial market, and broadening the scope of collateral can help narrow the gap of farmers'loan demand and improve the level of rural financial services.