Coordination Failure in the Rural Credit Markets

This paper emphasizes that although rural India has higher net savings at the national level, it faces a major credit constraint at the micro level. The paper attributes the gap to coordination failure, defining it as a situation where various agents in the system fail to coordinate their decisions to arrive at a mutually beneficial situation. The paper brings forth the following points for discussion:

• Rural bank mobilize more savings, charge lower interest rates, have higher transaction costs, disburse less credit and have high default ratio;
• Moneylenders charge high interest rates, have lower transaction costs, low default ratio and poor savings;
• The coordination failure results due to imperfect information nature of rural credit markets;
• The paper cites example from Indonesia where? Real interest rates doubled from 1982-1985 while the national saving tripled during the same period. During the same period the average loan size also increased from US $199 to $625.

The author concludes that:

• The problem of credit constraint lies in the delivery mechanism for credit rather than in the size of aggregate savings;
• The solution to rural credit constraint lies in innovative institutional designs;
• Higher interest rates and partnerships with self help groups for efficient delivery of credit helps rural banks to improve savings mobilization and credit delivery in rural markets.