8credit1_2010 - Credit 1: Overview & Theory November 9,...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
November 9, 2010 What do we know about Rural Credit (from Banerjee) 1): Sizeable gaps between lending rates and deposit rates within the same sub-economy lending interest rates in India 1950-1960 around 20%, deposit rate around 3% Dasgupta (1989), average interest rate from professional money lenders around 52%, maximum deposit rate around 14% Other, similar numbers available. 2): Extreme variability in the interest rate charged by lenders for similar loan transactions within the same economy Shikarpuri ±nanciers vary loan rates between 21-37% for members and 21-120% for non-members; Gujerati bankers charge rates < 18%; Calcutta and Bombay ±nanciers rates 9-18% Among professional money-lenders, rate is 52%, but agricultural money lenders charge 30%. Among prof money lenders, half loans at 60% or more, 40% charge < 36% Aleem (1990) in Pakistan ²average lending rate of money lenders 78.5%; std. dev is 38.14% ²in other words, 95% of loans are between (roughly) 2% and 150%. 3): Low levels of default Dasgupta - default costs can explain around 14% of the interest rates, even lower for some groups. Aleem ²median default rate for Pakistan moneylenders is 1.5-2% 4): Loans given primarily for production and trade ±nance, even when interest rates are high Most studies ±nd > =60% of loans are for ±nancing production 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
5): Richer people borrow more and pay lower interest Dasgupta - landless labor pays 28-125%, cultivators pay 21-40%. Second poorest group pay the highest average rate (120%), richest pay lowest (24%) 6): Bigger loans pay lower interest rates Why is this all so mysterious? 1): Ex ante, not so surprising that there is a gap between the lending rate and the borrowing rate. Intermediation is costly. What is suprising is the size of the gap: always > 10%, usually more than 14%; interest rates to depositors are usually 10%. intermediation costs cannot come near explaining the di/erence between lending and depositing rates. . Might expect high rates due to default, but default is low, usually less than 10% of loan costs. huge gap remains if we subtract this 10%. High variance of interest rates means that marginal product of capital in all markets seems unlikely to be equal. Moreover, some people must have very high marginal products of capital if they are using it for loans to unproductive sources, then? Might be that local info is very important. Really high marginal products might be at really low levels of capital. closely observe behavior, engage in repeated transactions, extract monopoly rents. Requires lenders to be local.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/09/2011 for the course EEP 115 taught by Professor Waynem.getz during the Fall '10 term at University of California, Berkeley.

Page1 / 7

8credit1_2010 - Credit 1: Overview &amp; Theory November 9,...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online