Reducing Default Rate in Rural Credit: How Effective is Enhanced Supervision Approach for Formal Financial Institutions?
18 Pages Posted: 15 Oct 2004
Date Written: October 12, 2004
Formal financial institutions viz. commercial banks are gradually shifting their priorities from rural credit due to many practical reasons. High default rate and non-viability of rural credit, and increasing pressure on these formal financial institutions, to be more profitable, are few of the basic reasons. This paper focuses on one probable approach of default mitigation, that is, enhanced recovery effort, lack of which is one of the potential reasons for high default rate in rural sector. The paper models a specific type of interaction between the regulatory and the institution and concludes that in a regulated competitive environment the institutions will not tend to increase effort for higher recovery of delivered credit unless the regulatory intervenes and directs the institutions to do so. Even after such intervention from the regulatory, the institutions will find it optimal to invest less in additional recovery effort in rural sector if rate of return is higher or the default rate is lower in alternative sectors of investment.
Keywords: Rural credit, Recovery effort, Default rate
JEL Classification: R38
Suggested Citation: Suggested Citation