Loan Repayment Behavior of Farmers: Analyzing Indian Households

Abstract

This paper uses the IHDS 2015-16 to analyze the nature and extent of indebtedness of Indian households. It studies utilization of loans taken from formal versus informal sector and the subsequent loan repayment behavior of these households. By analyzing repayment patterns we identify the characteristics of individuals who are defaulting. We study the source and purpose of borrowing, consumption and production patterns of households taking loan from different sources to gain insight towards the existence of moral hazard problem. We find that people who borrow from formal sources tend to have higher consumption, higher social spending and lower investment as opposed to people who borrow from informal sources. Higher spending, as opposed to investment, in turn has a negative impact on loan repayment.