Credit Market Structure and Collateral in Rural Thailand

Abstract

This paper empirically examines reliance on collateral in different credit market segments-formal, semiformal and informal lending-of a developing rural financial market. Determinants of collateralization indicate that all three types of lenders price risk conventionally. Controlled for standard risk factors, however, formal lenders rely on collateral about 40 per cent more often than informal lenders. The difference is explained by informal lenders' better information on borrowers. This is shown by informal lenders' behaviour: a longer lending relationship does not improve information about the borrower but shorter distance to the borrower does-the opposite applies to formal lenders, as predicted by theory.(J.E.L.: G21, O16, Q14).

Impact of credit rationing on capital allocated to inputs used by rice farmers in the Mekong River Delta, Vietnam

“…land in the case of rice farmers) so that the credit institution can reimburse for the loss of default resulting from prevalent risks facing the farmer, especially regarding rice yield and pricei.e. determinants of his income and debt repayment capacity (Kislat et al, 2017). In addition, land also enables the farmer to use loans efficiently to repay the debt.…”

“…Rice farmers who have resided longer in the locality may face less severe credit rationing since credit institutions would have more information to assess their creditworthiness (Kislat et al, 2017). According to studies on social capital such as Abbink et al (2006), Dufhues et al (2012) and Shoji et al (2012), credit institutions have more time to develop close relationships and effective sanction mechanisms as to rice farmers who have resided longer the locality to screen them and enforce repayment.…”

“…According to studies on social capital such as Abbink et al (2006), Dufhues et al (2012) and Shoji et al (2012), credit institutions have more time to develop close relationships and effective sanction mechanisms as to rice farmers who have resided longer the locality to screen them and enforce repayment. Longer relationships strengthen trust and enable credit institutions to loose requirements (especially collateral), opening up opportunities for rice farmers to get a better access to credit (Brewer et al, 2014;Kislat et al, 2017). For those rice farmers, credit institutions may first offer small loans (albeit high costs) to maintain and develop long-lasting relationships that benefit both parties.…”

“…Educationan indispensable constituent of human capitalis closely tied to the degree of credit rationing facing rice farmers (Pham and Izumida, 2002;Kuwornu et al, 2012;Kislat et al, 2017). Rice farmers with a higher education degree may have good managerial capacity to enhance efficiency, thus being better to honour debt repayment and confronting with less severe credit rationing.…”

“…As a result, females may have a better access to formal credit than their male counterparts (Fletschner, 2009). Asymmetric information prevails in rural credit markets since it is difficult for credit institutions to fetch right information about farmers due to geographical distance (Cerqueiro et al, 2011;Bellucci et al, 2013;Witte et al, 2015;Kislat et al, 2017). Because rice farmers disperse over a vast rural area, geographical distance and the resulted degree of asymmetric information between a credit insitution and a farmer are substantial.…”