DP11549 Financing Smallholder Agriculture: An Experiment wth Agent-Intermediated Microloans in India

Author(s): Pushkar Maitra, Sandip Mitra, Dilip Mookherjee, Alberto Motta, Sujata Visaria
Publication Date: September 2016
Keyword(s): Agent-based Lending, Agricultural Finance, Group Lending, Repayment, selection
JEL(s): D82, O16
Programme Areas: Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11549

Recent evaluations have found that traditional microloans have iinsignificant impacts on incomes and output. Randomly selected villages in West Bengal, India participated in a field experiment with a novel variant of microcredit called TRAIL, where the selection of borrowers of individual liability loans was delegated to local trader-lender agents incentivized by repayment-based commissions. Other randomly selected villages participated in a group-based microcredit program called GBL. TRAIL loans increased the production of the leading cash crop and farm incomes by 27-37%, but GBL loans had insignificant effects. To understand underlying mechanisms, we develop and test a theoretical model that explains borrower selection into the two schemes as well as borrower incentives to invest the loans for productive purposes. We find that borrowers selected by the TRAIL agents were more able farmers than those who self-selected into the GBL scheme; this pattern of selection explains about a third of the observed di fference in income impacts.