Essays on credit and savings in rural India

This thesis comprises of three essays on credit and savings in rural India. They are based on survey of 720 households conducted across 21 villages of Uttar Pradesh and Kerala, India.; The first essay examines access to credit in rural India and how responses to risk are affected by a household's access to credit. To measure a household's access to credit, I develop an equilibrium model of sorting based on random utility approach. I consider all sources of credit within a rural community and include production as well as non-production credit such as medical and consumption loans. The early results reveal that traditional approach would lead to biased estimates of access to credit because the predominant sources of credit are community level mechanisms of cooperation, despite the presence of specialized rural banks and local moneylenders. This mechanism of mutual cooperation takes two forms, informal cooperation between family and friends in the community and institutional cooperation where community members form a cooperative society. I provide empirical support for the view that households with access to institutionalized cooperation are better able to deal with income shocks than households that rely on informal cooperation. I am able to do this by comparing data for 720 rural households that I collected from two Indian states, Kerala and Uttar Pradesh. The results indicate that households that have access to institutionalized cooperation within the community are significantly less likely to cut consumption and production expenditure when they are faced with an income shock.; The second essay provides support to the general premise that having better ways to save can lead to better ways to borrow. In a typical framework, households borrow, invest and then repay the loan with interest. If house holds can save without difficulty, they should be able to follow any repayment frequency. In a standard economic model, there is no room for immediate pressures. However, in reality, it is likely that income gets diverted into miscellaneous expenses. If households realize this, then it is possible that they tie the repayment schedule of a loan to their income schedule. In this paper, I provide a simple model and empirical support to illustrate this point. The results indicate that a household which faces savings constraint is 32 percent more likely to tie a loan repayment schedule with its income schedule and pays 3.6 percent higher annual interest rate to do so.; The third essay examines the effects of income shock on savings decision of a household. In particular, it analyzes how an idiosyncratic income shock affects the composition of asset portfolios held by a household. It shows that income volatility contributes to poverty of rural households by leading them to reduce stocks of productive assets in order to accumulate liquid assets. Health related income shocks are significantly likely to do so, in addition to the weather related income shocks. This suggests that policy interventions in health infrastructure might have a substantial impact on rural income and wellbeing.