Financing Smallholder Agriculture: An Experiment with Agent-Intermediated Microloans in India Pushkar Maitra, Sandip Mitra, Dilip Mookherjee, Alberto Motta and Sujata Visaria Presentation June 2014 MMMMV (June 2014) Financing Smallholder Agriculture June 2014 1 / 60
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Financing Smallholder Agriculture:An Experiment with Agent-Intermediated Microloans in
India
Pushkar Maitra, Sandip Mitra, Dilip Mookherjee, Alberto Motta and SujataVisaria
Financial Inclusion of Poor Farmers: The Challenge
Institutional finance does not reach smallholder agriculture owing to:
lack of collateralpoor information and enforcement capacityhigh transaction costs
Poor farmers are forced to rely on credit from informal lenders at high cost(owing either to high capital costs for informal lenders, or usury, or both)
Prevents poor farmers from escaping poverty by diversifying into high-valuecash crops
Restricts agricultural growth
Major development challenge: can financial institutions lend profitably toproductive small farmers?
Microfinance has made impressive inroads in providing credit to the poor,while attaining high repayment rates
But it has not succeeded in financing productive needs in agriculture (inIndia)
Recent RCT-based evaluations of micro finance (Banerjee et al 2011, Fischer2013, Karlan and Zinman 2011) indicate it has had very limited success inpromoting entrepreneurship, risk-taking or borrower incomes
Mainly successful in allowing the poor to smooth consumption, acquireconsumer durables (Karlan and Zinman 2011, Islam and Maitra 2012,Banerjee et al 2013)
Key ingredients of traditional MF (intensive monitoring, peer pressure, limits onrisky choices, high frequency repayments) are viewed as necessary for selectionand repayment incentives for the poor.
Is there an inevitable trade-off between adequate selection/repayment incentivesand financing productive and risky activities?
How to ensure appropriate borrower selection and repayment incentives?
Can this be fiscally sustainable for lending institutions?
We design and implement a new approach to financing smallholderagriculture in two potato-growing districts of West Bengal, India
Distinctive features:
4 month repayment periods (timed according to crop cycles)built-in crop insuranceminimal monitoring by lender‘Low’ (18% p.a.) interest ratedynamic repayment incentives
TRAIL: 1 agent per TRAIL village, 30 borrowers recommended byagent; loans given to 10 randomly chosen from this list
GBL: Groups organized as per MFI protocol: 5 member groupsself-form, meet fortnightly with MFI officials, each borrowerrequired to save Rs. 50 per month;2 groups out of those that survived on cut-off date selectedrandomly
All lenders and connected borrowers are partitioned into different networks(caste/kinship/neighborhood groups with high social capital)
Each network consists of lenders and borrowers who behave in a cooperativefashion (i.e., maximize aggregate payoffs of network members)Share useful production and marketing information that raises farmproductivity: their projects have a high probability of success pc
Floating borrowers belong to groups with low social capital: behavenon-cooperatively, receive less help: projects have low probability pf ofsuccess, where pf (2− pf ) < pc
Groups of size two self-form to apply for joint liability loan
Assume both loans are repaid iff at least one borrower’s project succeeds
Assortative matching may or may not arise, but mixed groups will be similarto homogenous groups
A type (i , i) group will select a loan l iG for each to maximizepi fi (l)− pi (2− pi )rT l
ECC in GBL is pi (2− pi )rT , higher than in TRAIL (rT ) owing to jointliability tax
Borrowers have to attend group meetings, make regular savings to qualify fora group loan: imposes additional cost γi for a borrower of type i ∈ {c , f }.
In absence of any bribes, agent prefers to recommend own-network lenderrather than floating borrower for two reasons:
(a) Higher probability of loan repayment/commission(b) Internalization of benefits accruing to own-networkborrower
If floating borrower pays bribe, reason (b) disappears (best case scenario) but(a) remains
Agent also prefers own-network borrower to other-network borrower owing to(b)
The best he can do is to extract all possible surplus from other-networkborrower: gives him same profit as in the case of own-network borrowerIf agent’s bargaining power is any lower he cannot extract all profit and preferown-network borrower
Borrower Selection: TRAIL selection patterns will be biased in favor of borrowerswho:
pay lower interest rates on the informal markethave higher productivity
Impact on Cultivation and Incomes: TRAIL borrowers will borrow andcultivate high-value crops more, earn higher increases in farmincomeGreater dispersion of loan sizes and treatment effects in GBLcompared to TRAIL
Higher productivity implies higher rate of return achieved with respect to anexogenous expansion in cultivation (costs)
Use treatment status as instrument for cultivation costs: obtain IV estimateof RoR in TRAIL and GBL, assuming Cobb-Douglas production functionspecification
Alternative approach: calculate ∆VA∆CC where ∆ denotes corresponding
treatment effect estimate, and bootstrap standard errors (with 600replications)
Test the hypothesis that TRAIL agent recommended farmers withbelow-average default risk, while GBL invited applications from farmers withabove-average default risk
Present OLS and Heckman-selected regressions for informal interest rates(controlling for selection into borrowing, using household head occupationdummy as instrument)
Subsequently compare repayment rates between TRAIL and GBL
TRAIL incurred substantially lower administrative costs: per-monthper-village costs were Rs 68, compared with Rs 1463 for GBL
Bulk of the cost savings of TRAIL came from reducing loan officers’ salariesand transport expenses, since there were no group meetings in TRAIL
These costs amounted to Rs 1125 per month (at 2012 prices) per GBL village
In contrast, loan officers visited TRAIL villages only once in four months,resulting in personnel and travel cost of only Rupees 31 per month per village
Designed and experimentally evaluated microcredit designed to financesmallholder agriculture of high-value cash crops
Key differences between TRAIL and GBL: selection mechanism, andindividual vs. joint liability loans
Evidence shows TRAIL was successful in selecting productive low-risk farmersto expand cultivation of potato, and their own incomes (RoR in excess of70% at 2011-12 prices)
GBL induced eligible farmers to expand cultivation of potato, butcorresponding effects on output, incomes were insignificant
TRAIL achieved superior repayment and take-up rates, while reducingadministrative costs significantly
No evidence of extraction of TRAIL borrower benefits by agent, but thesebenefits were sensitive to price fluctuations