Why institutional credit agencies are reluctant to lend to the rural poor: A theoretical analysis of the Indian rural credit market

This paper examines why institutional credit facilities remain unable to extend credit to the rural poor. Analysis indicates that poor peasants at best can offer an entitlement set as a mortgage, comprised only of future shares of their harvest, which itself is subject to risk. Consequently, lenders can not advance loans without risking extensive loss of loanable funds. As the landlords' income is subject to the same risk as that of peasants, they advance loans to ensure that their own income is not affected by the peasants' financial situation. An extension of institutional credit to peasants results only in subsidization of landlords. (C) 1997 Elsevier Science Ltd.