Rural Credit Market and the Extent of Tenancy: Micro Evidence from Rural West Bengal

Abstract

In many developing countries, it has been found that the rural credit market is imperfect in nature. There are substantial variations in the availability of formal credit in rural-urban locations. In the process of agrarian transformation, the availability of credit plays an important role in influencing land-leasing decisions. In fact, it is widely believed that the land rental market acts as an institution to adjust the differences in the access to rural credit (Jaynes, 1982; Eswan and Kotwal, 1989). The higher the extent of credit, greater is the extent of lease-in-land and vice versa. However, the effect of credit constraints on land leasing behaviour could be different under alternative tenurial arrangements (Narayan, 2001). An asset poor farmer can overcome a credit constraint by interlinking sharecropping contract with the provision of credit. In contrast, under the rental arrangement, the extent of lease in land is bound to decline with the credit constraint. Empirical literature exploring the impact of credit constraint on the leasing behaviour of the farmer households is relatively scanty. In a significant contribution to the existing literature, Kocher (1997) found that formal credit does not play so much an important role on land leasing decisions as the ownership of land does. The aggregative analysis as carried out by Kocher was criticised by Narayan (2001) on the ground that it fails to capture the differential role of credit in land leasing decisions under alternative tenurial contracts and suggested an alternative specification which can provide a rationale for the insignificant result of the role of credit in explaining leasing decisions. In fact, Narayan (2001) examined the role of credit on the nature of land leasing decision under alternative tenurial contracts in a disaggregated manner. It was postulated in the study that large farmers are more likely to enter into rental contracts and would therefore be less likely to lease in land if they are credit constrained while the marginal or small farmers would lease more land under sharecropping contracts if they were credit constrained. Empirically the proposition was verified and it was found that credit has a positive impact on land leasing decision for small farmers and a negative impact for large farmers. One of the