Access to Credit and Temptation Goods

This paper attempts to estimate if credit access can discipline the borrower in terms of consumption of goods like tobacco and alcohol, using a large scale agricultural credit reform from India. While such evidence of disciplining behaviour exists for group lending and microfinance programs, there is very little known about this for more formal and large scale credit programs. This paper uses a triple difference identification strategy exploiting exogenous variation in the reach of the program generated by institutional features and coverage intensities. Essentially, the methodology relies on differences in mean outcomes between districts having more banking infrastructure and the ones having less number of banks, states that are politically aligned with the centre versus ones that are not and states that have high initial program penetration with states that are laggards in implementation. The idea is that in the absence of the actual policy variation, these triple differences would be statistically indistinguishable from zero. The paper relies on nationally representative household survey data from India for the analysis. The findings suggest that access to credit leads to a decline in consumption expenditure on temptation goods such as tobacco and other intoxicants but increases expenditure on necessary items such as food. While usually such results are explained by the presence of strict monitoring regimes in institutions such as microfinance, in our case because there is no clear monitoring regime, alternate explanations must be explored. Intuitively the results can be explained by lack of stress from peer pressures of repayment leading to reduced dependence on intoxicants. The paper contributes to the literature by providing novel evidence of reduced consumption of intoxicants with access to credit in a non-monitored environment. Major policy implications coming out of this study is that it may not always be necessary to have a strict regiment for monitoring of loan usage and repayments as it may be counterproductive. It may be far more efficient to have a more liberal credit program with simple norms for eligibility which will not only relax credit constraints but also lower stress levels of borrowers. Given the agricultural credit angle of the program under study, such policies may eventually be beneficial in lowering farmer suicides resulting from stress of repayments.