www.theigc.

org
Directed and Organised by
International
Growth Centre
London School of Economics
and Political Science
4th Floor, Tower Two
Houghton Street
London WC2A 2AE
United Kingdom
For media or
communications
enquiries, please
contact Mazida Khatun
mazida.khatun@theigc.org
a
Louisiana State University, achanda@lsu.edu
Evaluating the Kisan
Credit Card Scheme
Areendam Chanda
a
Working
Paper 12/0345
May 2012
Evaluating the Kisan Credit Card Scheme: Some
Results for Bihar and India
A Report prepared for the International Growth
Centre, Patna and London.

Areendam Chanda
Louisiana State University
March, 2012
Abstract
The Kisan Credit Card Scheme was introduced in India in 1998-
99 has since become a agship program providing access to short term
credit in the agricultural sector. According to the Government of India,
over a 100 million cards had been issued cumulatively by March 2011.
Using data from 2004-05 to 2009-10, the paper critically examines the
determinants of KCC lending across states in India and districts in Bi-
har. We also examine the eects of the scheme on agricultural growth
and yields. Our results suggest that states with initially better ac-
cess to agricultural credit show sbsequently greater amounts of KCC
lending. However, Bihar and other BIMARU states also show faster
adoption rates that cannot be explained by their recent growth ac-
celerations. Within Bihar, we see that districts with initially greater
lending in KCC continue to to pull further away from other districts
while in terms of account holders there is evidence of convergence. Fi-
nally, we do not see any evidence of KCC lending on state or district
level agricultural productivity.
JEL Classication: Q14, Q0, O41, O47
Keywords: Agricultural Growth, Financial Markets, Short Term
Credit, India.

Corresponding author: achanda@lsu.edu. I am indebted to the very able research

assistance of Pronay Sarkar and Ting Wang.
1
1 Introduction
In the study of economic growth, the role of nancial intermediation has
been always at centre stage. Well functioning nancial markets, by lowering
costs of conducting transactions, ensure capital is allocated to projects that
yield the highest returns and therefore enhances growth rates. In the context
of new growth theory, early contributions such as Jovanovic and Greenwood
(1990), Galor and Zeira (1993), and Banerjee and Newman (1993) have laid
down the theoretical foundations of the role of credit market imperfections
on growth via various channels. The empirical importance of nancial mar-
kets in economic growth was further solidied in a series of papers including,
but not limited to, King and Levine (1993), Levine, Loayza, and Beck (2000)
and Beck, Loayza and Levine (2000). Since the beginning of independence,
the importance of access to adequate credit has also been at the center piece
of policy making in India. The country has been characterized by a large
agricultural sector as well as a large small-scale industrial sector, taken to-
gether which continue to form the bulk of employment. Providing access to
credit for these sectors has been a key driver of banking sector policy and
formed the intellectual basis for bank nationalization and various priority
sector lending schemes.
This paper examines the impact of one important nancial policy inter-
vention aimed at addressing this problem- the Kisan (farmer) Credit Card
(KCC) scheme on state level per capita incomes and agricultural produc-
tivity. The KCC scheme was introduced by the government of India in
the 1998-99 budget to displace a tangled web of other short term agricul-
tural credit schemes that had become increasingly burdensome and inade-
quate. Samantara (2010) notes that the earlier system was characterized
by a multiple-product, multiple agency system that varied based on the
particular crop, input needs, season, size of borrowing, etc. What may
have seemed like an array of choices, essentially involved a farmer having to
make multiple loan applications for dierent stages and needs of the farming
process..The KCC scheme was introduced to move away from the maze of
ineciency towards a more consolidated system where the borrowers were
subject to fewer parameters and given more freedom to use the credit. It is
in essence, a revolving credit line as opposed to the older system of demand
loans.
By 2004, the Reserve Bank of India, noting the increasing popularity
of the KCC scheme, expanded its ambit to cover investment needs of the
farmers as well as consumption credit needs in addition to traditional crop
2
loans.
1
The KCC scheme has now been around for more than a decade
and has become a core element of the government of Indias recent push for
nancial inclusion, especially in rural areas. By March 2011, cumulatively
more than a 100 million KCC accounts had been issued. Indeed, annual
targets by commercial, rural and cooperative banks are set so that eventually
100% of eligible farmers are covered by the scheme. Given the dominant role
that this scheme has come to play, it makes sense to ask whether this has
had any eect on agricultural growth. That is precisely what we try to do
in this paper. In the rst half of the paper, we focus on inter-state eects
of the KCC scheme and the achievement of Bihar relative to other states.
This part of the study can be divided into two parts, a) an examination of
the determinants of kcc adoption rates across states, and b) the eects on
state level agricultural productivity, food grain yields and also overall state
GDP per capita. We undertake both ordinary least squares to gauge the
medium term eects and xed eects to estimate more short term eects.
Furthermore, since the paper is concerned with Bihar, we ask whether Bihar
was any dierent compared to other states in terms of adoption of the KCC
scheme.
In the second half of the paper, we move the focus to districts in Bihar
where we repeat the two exercises. At the district level it is more dicult
to obtain reliable measures of sectoral output or even total value added.
Though we do use some limited data at our disposal, most of the analysis
examines the impact on agricultural yields. We also share some thoughts on
the scheme based on our discussions with government ocials and bankers
we met with during the research project.
Before describing the data and our ndings, we rst discuss the KCC
scheme in a little bit more detail and the relevant literature. We also briey
survey the already large literature on nancial development and economic
growth in India.
1.1 Background on the Kisan Credit Card Scheme
As noted the KCC scheme was introduced in 1998-99. While the scheme
centers around a revolving credit line facility, it is not really a credit card
in the traditional sense While some banks in other states do issue credit
cards, we are not aware of any bank in Bihar that actually issues one
2
The
1
See RBI (2004)
2
While the government of India forges ahead with plans for introducing ATM facilities
for these non-existent cards, most of the facilities, at least in Bihar, are still very much
based on the concept of branch-banking.
3
key features that are supposed to make the scheme user friendly include
a) no collateral requirements, b) less stringent monitoring of actual use of
loans, and c) easy renewal after three years for borrowers in good standing.
We expand on these briey. One of the key advantages (and a stated goal)
is to make credit available without burdensome requirements. In keeping
with this, farmers do not need to provide a security deposit to qualify for
the loan. They can qualify for the minimum amount upon producing docu-
mentation of land possession (in Bihar, this is usually the Land Posession
Certicate). The amount varies from bank to bank, and also depends on
the scale of nance - a formula based on the crop and size of landhold-
ing. Nevertheless for comercial banks, the amount usually stands at INR
50,0000. Cooperative banks and regional rural banks will usually lend at
lower amounts. Borrowers are eligible to borrow larger amounts but need
to provide collateral. Once the loan is approved, the borrower is free to
borrow up to the maximum amount at an annual interest rate, currently
at seven percent (xed by the Reserve Bank of India). However, timely re-
payment is rewarded by lowering the interest rate by two percentage points.
Even though there is no compulsion to borrow the entire amount lump sum,
Samantara (2010) notes that it is the norm. Once the money is borrowed
there is no monitoring of the actual use. This is a major dierence between
the KCC scheme and all other previous crop loans where farmers had to
produce receipts to actually get the loans and the bank made payments
directly to the supplier instead. Nevertheless, it opens up the possibility
of using the funds for purely consumption purposes, and also for arbitrage
gains. Indeed, discussions with bank ocials indicate there is anecdotal evi-
dence that this is the case. The low interest rate (lower than recent ination
rates in India) create ample opportunity for such abuse. If this were indeed
the case, then one should not be surprised to see higher consumption growth
rates instead of higher agricultural productivity. Finally, if a borrower is in
good standing, then the loan can be renewed for another three years. Some
banks have now raised the validity to ve years and have raised the minimum
non-collateral amount to 100,000 rupees.
3
The scheme is implemented by
commercial banks, regional rural banks and cooperative banks. Commercial
banks are the largest lenders though regional rural banks and cooperative
banks play an important role in many states. Nationally, cooperative banks
have become less important over time and tend to lend lower amounts.
3
What we have listed is a brief overview of the scheme.
Specic details can be viewed on the NABARD website at
http://nabard.org/development&promotional/kisancreditcardmore.asp#.
4
There is hardly any doubt that, KCC is the single largest government
scheme to introduce short term unsecured credit across the agricultural sec-
tor. In fact, our perception is that as far as short term unsecured credit is
concerned, this is probably the most ambitious scheme introduced by the
Indian government. Despite the KCC scheme having become the dominant
source of short term agricultural credit over the past decade, there has been
little or no research studying its impact on agricultural productivity and
other outcomes.
4
There have been three important micro-level surveys over
the past twelve years. In 2000, a study was commissioned by the Planning
Commission to get a sense of the progress of the scheme in its early stages.
5
Though the scheme was introduced nationally, dierent states have shown
remarkably dierent degrees of enthusiasm. The survey noted that by the
end of 2000, Andhra Pradesh had already achieved a card to landholding
ratio of thirty percent while Bihar stood at a little more than one percent.
As we shall see, Bihar has shown tremendous growth over the past ve to
six years. The next major survey was conducted by National Council of
Applied Economic Research (NCAER) in 2005 which spanned several states
and surveyed both banks and borrowers.
6
Bihar however was not included
in that survey. Most recently, in 2010, the National Bank of Agriculture
and Rural Development (NABARD) released the results of another survey
which again spanned several states but also excluded Bihar.
7
All three
surveys provide an excellent chronological narrative on the evolution of the
scheme and its failures and strengths. The NABARD report, being the most
recent, highlights some continuing challenges. Perhaps the main challenge,
both from a policy perspective as well as for any empirical work such as this
is the problem of multiple cards per borrower. From discussion with Bank
ocials in Patna, it is obvious that this is commonplace. Banks have tried
to address this problem by requiring borrowers to produce no-dues certi-
cate from neighboring branches of other banks. However, that increases the
burden on the borrower and it is not dicult to produce counterfeits.
8
.The
report also highlights some other problems such as inadequate credit limits
(particularly with cooperative and regional rural banks) and the need for
4
This is not to suggest that other schemes are not important. In fact a quick look
at the agricultural banking section of the State Bank of Indias website suggests at least
another thirty lending schemes in operation.
5
See Planning Commission (2002).
6
See Sharma (2005)
7
See Samantara (2010)
8
Indeed, one bank manager himself admitted that it was easy to create counterfeit no
dues certicates.
5
a longer validity period. On a positive note, the report notes that eighty
percent of holders tend to renew their accounts, obviously signalling strong
satisfaction with the scheme. Unfortunately, none of the surveys report
data on default rates.
9
The fact that default rates are not systematically
collected implies that much of the results in this paper have to be inter-
preted cautiously. Finally, while all of these surveys are an excellent source
of information on the success and failures of the scheme at the individual
level, they were not undertaken to study the impact of the scheme on the
agricultural sector in India.
1.1.1 Research on Agricultural and Rural Credit in India
While the regional eects of the KCC scheme have not been studied, there
is an extensive literature on the eects of nancial development on agricul-
tural and rural growth. This is not surprising in itself, since most of the
major policy developments, particularly the history of bank nationalization
in post-Independent India have been structured keeping agricultural and
small scale industry in mind. Without going into excessive detail about
this large literature, we quickly summarize some of the more recent nd-
ings. At the core of the research lies a more or less uniform set of questions-
did changes in banking sector policies targetted to agriculture achieve their
objectives in terms of increasing access to nance, lowering poverty and in-
creasing productivity growth? In a well known paper Burgess and Pande
(2005), exploit an important event in Indian policy making, the enactment
of the branch expansion program in 1977, to show that increased access to
banking in rural areas reduced poverty and increased output. Moreover,
they show that an increase in bank branches also increased non-agricultural
output implying increased diversication of the eocnomy. Furthermore, they
note that since the program was abandoned with liberalization in 1990, the
number of branches per capita has not increased. In similar vein, Cole (2009)
uses the nationalization of private banks in 1980 to examine the eects on
access to credit and output growth. However, he nds that while national-
ization indeed increased access to credit to priority sectors of the economy,
and lowered interest rates, there is no evidence that it increased agricultural
output and might have even slowed the growth of non-agricultural sectors.
Kendall (2009) uses an innovative, but publicly restricted data on district
level GDP to examine the eect of nancial development on growth. He
9
Most bank ocials we met insisted that default rate was near zero. On pressing the
issue a little more, at least one ocial suggested that the rate was higher than that of
private loans but lower than that of other priority sector loans.
6
nds a strong nonlinear eect on nancial development on output. Guha
(2009), looks at state level data over a three decades (1973-2004). While his
ndings are supportive of Burgess and Pande, he also nds that the relation-
ship between nancial sector access and growth has become fragile during
the post liberalization period. a consistent feature of all these studies is the
use of commercial bank credit. While it is true that commercial banks are
the predominant source of credit, at least for KCC, regional rural banks also
play a sizeable role nationally.
10
Fortunately, for KCC, we have data on all
sources.
Finally, Ramakumar and Chavan (2007) look at the composition of agri-
cultural credit over the long run. More particularly, they examine the pat-
tern of direct credit to agriculture vs indirect credit. While the KCC scheme
was originally introduced in 1998-99, it was only in 2004, that the govern-
ment of India made a concerted push at doubling agricultural credit. Growth
in agricultural credit had slowed down to a crawl in the post liberalization
period. They observe that agricultural credit increased at the rate of about
two percent annually between 1990 and 2000. However, between 2000-2006
credit has been increasing at the rate of twenty percent annually with growth
in indirect credit outpacing growth in direct credit. Indirect credit as the
name suggests are loans not given directly to farmers. The usual benecia-
ries are input suppliers, agro-food processing units, state electricity boards,
and even NGOs. Direct credit is given directly to farmers and includes
short term crop loans (which KCC has displaced) as well as other direct
medium term and long term loans. For our period of study which spans the
years 2004-05 to 2009-10, we nd that indirect credit mildly outpaced direct
credit. The former grew at the rate of 32% while the latter grew annually
at 27%. Nevertheless this suggests that there has a substantial increase in
credit in agriculture over this period and not just KCC credit.
11
Clearly
this makes it more dicult to disentangle the eect of the eects of KCC
scheme from other sources of agricultural credit. In our econometric work,
we include a separate variable to cover overall trends in agricultural credit.
12
Other than broad based trends in credit, one also needs to be aware of
10
However, while RRBs are distinct entities, they are ultimately owned by commercial
banks.
11
Over the same period direct credit which, in 2004-05 was 2.7 times that of indirect
credit, had declined to 2.2 by 2009-10.
12
We should note here that there is some diculty in comparing overall agricultural
credit with KCC credit. RBI provides data for these two variables in separate publications.
The agricultural credit numbers that we have quoted above refer to outstanding credit
while the KCC data is the amount loaned in a particular year. See appendix 1 for the
data sources.
7
other major credit interventions during this time period. Our reading of
agriculture and rural credit policy suggests that there might be at least two
other interventions that might confound the eects of KCC. One involves
the bank credit linkage program given to Self Help Groups (SHG). As the
name suggests this is a micronanced based initiative which involves nation-
alized banks. Technically, this is not a program for the agricultural sector
but given that its rural in scope, it can conceivably have important general
equilibrium eects. However in terms of magnitude, its far less than KCC.
In the year 2009-10, KCC lending was at around 55,000 crores while SHG
lending was much less at 15000 crores. A second important credit initiative
is the Rural Infrastructure Development Fund (RIDF) introduced in 1995.
This involves long term indirect credit to the agricultural sector (i.e. not di-
rectly to farmers). However, this scheme too is of a much smaller magnitude
recording a cumulative credit of 120000 crores until 2009-10.
13
Thus clearly
both schemes are much smaller in scale compared to the KCC scheme.
2 Data and Methodology
Our study covers the period 200506 to 2009-10. Even though the KCC
scheme has been in eect much longer, earlier state level data remains elu-
sive. For the state level analysis, the data on KCC comes from the Reserve
Bank of Indias annual Trends and Progress of Banking in India. Unfortu-
nately, the data goes back only until 2004.
14
The data itself is fairly detailed
in that for each state we know what amount was issued by bank type - com-
mercial, regional rural, or cooperative. We also know the number of account
holders.
15
In addition to KCC credit, we also have data on commercial bank
credit to agriculture and other sectors of the economy on an annual basis.
This provides a useful control for our econometric exercises.
To measure outcomes, we look at three major indicators of development-
real state net domestic product per capita, agricultural gdp per worker, and
foodgrain yield. The data on state domestic product and agricultural gdp
13
Numbers for both schemes are compiled from the NABARD website.
14
The data portal, Indiastat.com provides data on KCC for earlier years but these are
based on questions answered in the parliament and often are not for a complete year.
Hence, we avoided the data there. The RBI mentions NABARD as its source of data.
Repeated requests to NABARD ocials were met with no response.
15
However, even for the years for which data is available, it switches from ows to stocks
and back to ows. Since we are interested in the ow of credit, the stock data for 2007-08
needs to be dropped form the analysis.We tried some back of the envelope corrections
supplementing the data with numbers from Indiastat but it led to unusually high values.
8
can be obtained from the Reserve Bank of India website. Foodgrain yield
statistics were collected from the data portal, Indiastat.
16
For population
and workers, we used data from the 2001 and 2011 census and interpolated
numbers for the intervening years.
17
For the section of the paper devoted to district variation within Bihar,
the KCC data comes from the State Level Banking Committee (SLBC) re-
ports for various years. The SLBC is an apex bank committee in each state,
and under RBI guidelines, is required to meet every quarter. The reports
provide a wealth of information on lending and deposit activity by nation-
alized banks (including rural and cooperative banks). The report for the
meeting in the summer (usually held in May or June every year) summa-
rizes annual information for the nancial year ending on March 31st. One
table in the report includes lending by banks in the various priority sectors,
crop loans, and loans under various other schemes as well as the number
of KCC cards issued in the preceding year. Another table includes credit
and deposit by district. Data from these tables form the basis for measures
of KCC credit and nancial development. It is important to highlight here
the fact that KCC loan amounts are actually not available by district only
until recently (starting with the 2008-09 report). However, as we mentioned
earlier, as early as in 2004, the RBI noted that almost all crop loans were
being routed through KCC. Hence, we use the crop loan value from 2004
onwards as a measure of KCC lending for the district level analysis. On the
other hand, the number of KCC accounts issued in a given year is explicitly
listed. Since account holders are eligible to borrow every year for three years
(i.e. until the account is up for renewal), instead of using a particular years
measure of new accounts, we use the sum of that year and the preceding two
years accounts. This gives us a more accurate measure of account numbers
against which lending activity can take place. For both the inter-state and
inter-district analysis we look at the amount loaned as well as the account
holders. At the district level, we do not have value added data for sucient
number of years, so we primarily rely on the yield of foodgrain crops as a
16
Indiastat cites Ministry of Agriculture as their sources. For some overlapping years,
we conrmed that the data matches those published in the annual Agricultural Statistics
at a Glance published by the government. Unfortunately only selected volumes of the
ocial publication were available online.
17
Rural population numbers are available for both census years. However, agricultural
workers is only available for 2001 census. We need agricultural workers to calculate agri-
cultural productivity. To extrapolate agricultural worker numbers for the remaining years,
we assumed that the ratio of agricultural workers relative to the rural population is un-
changed. Needless to mention, this is a substantial assumption since the rural population
tends to become increasingly non-farm with economic growth.
9
dependent variable.
For the state level analysis, we ask three dierent questions a) What are
the determinants of growth in KCC lending over the period 2005-09, b) Did
Bihar do better or worse during this period relative to other states? In other
words, is there a Bihar eect? In particular, we look at Bihars perfor-
mance relative to other BIMARU states as well,
18
and nally, c) whether
higher KCC lending led to higher growth rates of overall state GDP per
capita, agricultural GDP per worker, and yield. At the district level, we
revisit question (a) and (c) though the latter can only be done for a limited
time span which unfortunately does not overlap with the bulk of the period
of high KCC growth in Bihar.
19
To examine question (a) and (b), we run both ordinary least squares
(OLS) and xed eect (FE) regressions. The main aim of this section is
simply to identify any patterns on credit growth. The OLS specication is,
ln(1CC variable
i;t
)=c +, ln(1CC variable
i;tj
) + ln(1111\
i
) (1)
+0
1
11H1
i
+0
2
11'1lA11
i
+
0
A
it
+-
it
In this specication, the dependent variable is a measure of KCC (amount
relative to GDP or account holders relative to rural population). The inde-
pendent variables include a lagged value of KCC to control for path depen-
dency, a control for nancial market development (usually commercial bank
credit to the agricultural sector relative to agricultural GDP) and some ad-
ditional controls such as the lagged share of agriculture and literacy rates.
We run an OLS version of the regression using values of the dependent vari-
able from 2009-10, the latest year for which we have the necessary data. To
test if Bihars achievement was any dierent from other states, we include
two variables, a dummy variable for Bihar and a second dummy variable for
other BIMARU states. The latter is done to rule out the possibility that
the Bihar eect might pick up a more general eect that is applicable for all
BIMARU states. For this specication, we also run regressions including an
average growth rate for the intervening period as a control to ensure that
the Bihar eect does not simply reect the high growth Bihar has experi-
enced. Given that we use dummy variables for some states, obviously we
cannot run xed eect regressions under this specication. For the xed ef-
fects version, instead of averaging we examine annual values. However, given
18
Other BIMARU states include Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Ut-
tarakhand, Rajasthan and Odisha.
19
This is because the district level GDP data is available only for the years 2004-5 to
2007-08.
10
the small number of states, usually twenty eight, and the small number of
years, three, the xed eect regressions should be taken with a degree of
skepticism. Furthermore, it is well known that with lagged dependent vari-
ables, estimated coecients are biased and it is more advisable to use an
Arellano-Bond GMM estimator. However, such GMM estimators are valid
only for large samples and small time periods which is not applicable in this
setting. Moreover, one usually needs at least 4 time periods to undertake
such estimates which we do not have.
20
Our xed eects equation is,
ln(1CC variable
i;t
)=c
i
+, ln(1CC variable
i;tj
)+ ln(1111\
it
)+
0
A
it
+-
it
Moving on to (c), where we examine the impact of KCC on more macro
aggregates, our specication is broadly in line with standard growth regres-
sions going back to Mankiw, Romer and Weil (1992) and King and Levine
(1993). Therefore, we include a lagged initial value and additional controls
particularly to control for education and investment. Therefore, we have,
ln(Growth
i;t;tj
)=c +, ln(Initial GDP)+
1
ln(1CC variable
i;t;tj
) (2)
+
2
ln(1111\
it;tj
) +
0
A
it
+-
it
For these exercises we look at the eect on growth rate of GDP per
capita, growth rate of agricultural GDP per worker, and the growth rate of
yield per hectare over the period 2005-2009. We run OLS regressions with
measures of KCC lending relative to GDP over this time period or KCC
Account holders relative to the rural population over this time period. To
control for human capital, we included literacy rates. Capital formation data
is not available for states. As a proxy, we used the average annual outlay for
each state from the eleventh planning commission relative to state output.
However, we should mention here that neither literacy rates nor plan outlays
were signicant in any of our regressions and given the small sample, we have
not included them in the estimates presented here. To control for the growth
of overall credit, we include the commercial bank credit to GDP ratio as an
additional control. We use all commercial bank credit relative to state GDP
per capita when the dependent variable is state GDP per capita growth, and
agricultural credit relative to agricultural GDP when we look at the impact
20
Also, since the 2008-09 KCC data is unreliable for the state level analysis, we cannot
do xed eects for KCC account holders (since that requires use of lagged values in the
construction of account holders, as described above.)
11
on the agricultural sector. Finally, to the extent that the overall output
composition of the state can explain dierence in economic growth, we also
include the initial share of state output in agriculture.
In addition to estimating direct eects, we also examined whether there
were non-linear eects. In particular, it has been repeatedly shown that
states that did better during the pre-liberalization period did even better
during the post liberalization era.
21
To check if this is also true with the
KCC scheme, we also add an interaction term, 1CC variable
i;t;tj
Initial
Agricultural Productivity
i;tj
. Finally the growth exercise is also repeated
using xed eects rather than OLS. When examining the district level vari-
ation within Bihar, we conduct exercises in more or less the same spirit. We
do not have as many variables but we do have a larger sample (Bihar has 38
districts, while for Indian states, by the time one adds all the controls, we
are down to only 28 observations). However, because of the fewer number
of variables, we did not conduct xed eect regressions for Bihar.
3 Results
3.1 State Level Analysis
3.1.1 Trends and Patterns
Before we discuss the regression results, it is useful to look at some data
patterns and trends for the KCC measures, overall nancial development
and overall state growth. The summary statistics for these variables are
presented in Table 1.
22
Growth rates in GDP show considerable variation
ranging from 3.3% (Jammu and Kashmir) to 11.8% (Uttarakhand). Bihars
average growth during this period is half a percentage point higher than
Indias. When we look at the two measures of agricultural growth we some
interesting contrasts. Looking at agricultural output per worker, we see
that growth for India as a whole at 3.7% was almost half of overall GDP
per capita. Thus even though the denominators are dierent (workers vs
population), it is clear that agriculture was a drag on growth. However states
like Maharashtra grew at 10% while for Bihar, it seems that the growth
miracle happened despite zero agricultural growth. However, when we look
at yield growth which is measured in terms of kilos per hectare of foodgrain
21
On more evidence on divergence across Indian states, see .Kocchar et al (2006), Ghani
et al (2010) and Kumar and Subramanian (2011).
22
For all regressions, we exclude Chandigarh and Delhi since one is a union territory
cum city and the second is a city state.
12
production, we see Bihar looks much better with 3.8% High yield growth
in agriculture accompanied by poor labor productivity growth need not be
a contradiction. In fact it might be a sign that growth in output has been
due to a rising labor-land ratio. This could be worrying to the extent that
it implies an unbalanced growth of factor inputs have largely driven output
growth as opposed to technological improvements. This is something we
leave for future research.
The commercial bank credit variables also provide some interesting in-
sights. The Commercial bank credit ratio to overall GDP for India is at
60%. If one looks instead at agricultural commercial bank credit to agricul-
tural output, the average for India is 50%. These numbers are very close
and seem to indicate the the nancial sector penetration in the agricultural
sector is almost as good as that of the economy overall. It is unlikely that
this reects a composition eect, i.e. the former number being high because
the agricultural sector is a large part of the economy. In fact the share of
agricultural sector, in nominal terms was around sixteen to seventeen per-
cent, hardly enough to create a large composition eect. For Bihar, both
these ratios are less than half of that of Indias. Next we look at commercial
bank KCC credit relative to overall commercial bank credit and commercial
bank agricultural credit. For these ratios its useful to keep in mind that the
numerator is the amount of KCC credit issued in a given year. One problem
with the data is that it is not clear how much of the approved credit line
was actually borrowed as opposed to being left unused. The denominator,
commercial bank credit, is on the other hand a stock variable since it cap-
tures all outstanding credit. As a result the ratios might be smaller than
what we would have seen if we had a ow measure for the denominator.
23
Keeping these in mind, we can see that KCC lending relative to commercial
bank credit even for the agricultural sector is relatively small at ten percent
for all of India. Indeed for Bihar it is actually higher at fteen percent.
This may reect the possibility that in Bihar, almost all agricultural credit
by commercial banks is short term and not long term (or what we earlier
referred to as indirect nance). Hence, it is not entirely a good sign.
Finally, we summarize the two variables that we actually use as our
measure of KCC penetration- the amount of credit relative to agricultural
output and the number of account holders relative to the rural population.
23
One strategy is to take the dierence in outstanding credit between one year and the
next to proxy for a ow. However this reects net new credit (new amounts issued less
old loans repaid). This can exaggerate the magnitude of KCC lending relative to other
types of lending. We did try it, but did not pursue it further since some states recorded
negative values of net new credit.
13
KCC credit here includes credit issued through all three bank types. While
the Indian average for the former is at around 8%, Bihar is actually not too
far behind at 6%. Also, the mean value of all states is similar to that of Bihar.
Not shown on the table is also the fact that Bihars value is also the median
value. When it comes to KCC relative to the rural population, we see much
lower numbers in terms of reach- for India as a whole this is at three percent
while that for Bihar it is much lower at less than two percent. KCC credit
is usually given on the production of land certicates. Therefore, in theory,
only cultivators are eligible for KCC credit. This can cause our second
variable to be low for possibly two reasons - a) if the share of agricultural
workers in the rural population is low, and b) if the share of cultivators
within the agricultural workforce is low. Therefore, it is plausible to argue
that one should look at KCC account holders relative to the number of
cultivators. Unfortunately, such numbers are not available since information
on cultivators versus wage laborers is only available from the 2001 census.
We tried extrapolating the data by assuming that agricultural workforce
share of the rural population has not changed. We did not get substantially
dierent results. We chose not to present them here since these values can
contain large measurement error specially for fast growing states such as
Bihar since, with rapid growth, workers tend to migrate to non-farm rural
jobs.
Having discussed the overall patterns, we briey look at pairwise cor-
relations next. The results for these are displayed in Table 2. Gleaning
the table, one of the rst striking features is how little the three outcome
variables are correlated with each other. The correlation between overall
state gdp per capita and agricultural productivity is weak and the former
is uncorrelated with yield growth. Moreover, yield growth itself is uncorre-
lated with agricultural productivity growth. Both measures of commercial
bank credit are correlated with overall state output growth but have little
relation with agricultural growth. More surprisingly agricultural credit from
commercial banks is weakly correlated with both measures of agricultural
outcomes. The KCC variables themselves are more strongly correlated with
output growth rather than agricultural growth. It is perhaps premature to
read too much into the simple correlations but nevertheless, it is somewhat
disappointing to see no strong eects between any of the agricultural credit
measures and agricultural growth.
Moving on from ve year averages, we now depict some over trends with
respect to KCC credit. Figures 1 and 2 do precisely that. In gure 1, we
plot the KCC credit to Agricultural GDP ratio for 2005-09 to 2009-10. This
covers less than half the time KCC has been in existence but also coincides
14
with the period which the national government has made a strong push for
nancial inclusion. It is apparent that KCC credit relative to agricultural
GDP has not necesarilly increased for all states. In fact Karnataka (which
was a leading state in KCC adoption initially) has seen its credit share fall.
On the other hand, Bihar has shown signicant progress and by 2009 was
actually among the top three large states.
24
In fact, India (IN) as a whole
has seen the ratio decline. Figure 2 captures the trend for account holders
instead of credit ows. As discussed before, account holders are aggregated
over the current year and the two previous years keeping in mind that the
KCC accounts have a three year validity. Hence aggregating over a three
year period provides a better measure of the number of potential borrowers.
Relative to the rural population it does not seem as though states have
made huge gains in KCC account holders. This is true for India as a whole.
However Bihar and Himachal Pradesh are obvious exceptions.
Before we wrap up the discussion on stylized facts, we also draw attention
to the variation in source of KCC lending. While commercial banks are
usually the largest lender, regional rural banks play an important role as
well. Table 3 highlights the patterns based on some selected states. For
India, as a whole, the role of commercial banks has increased remarkably
form 40% to about 70%. However, underlying this is remarkable variation.
Andhra Pradesh, one of the states with stong KCC penetration, reects the
national pattern with commercial banks cementing their dominance during
this ve year period. Bihar on the other hand, shows zero cooperative
bank participation initially but has seen this increase a little over the years.
Overall, commercial banks and regional rural banks tend to dominate. In
Kerala, we see something entirely dierent where commercial banks and
cooperative banks have an almost equal share. This is fairly stable over the
ve year period. These statistics reect back to our earlier concern that most
of the research literature on nancial development in India uses commercial
bank data. However, when it comes to short term agricultural credit ignoring
the regional rural banks and cooperative banks not only implies leaving out
thiry percent of credit activity but also some of the variation that might
play an important role in productivity growth.
24
For the abbreviation codes, please see appendix 3.
15
3.2 Regression Results
3.2.1 Determinants of KCC lending
Table 4 displays ordinary least squares estimates based on the specication
in equation (1). The dependent variable in columns (1) and (2) are the KCC
credit amounts relative to agricultural GDP in year 2009-10. In columns (3)
and (4) it is the No. of KCC Accounts issued in 2009 and the preceding
two years relative to the rural population. For columns (1) and (3) the
dependent variables include the four year lagged value of the independent
variable, a lagged measure of agricultural gdp per worker, a lagged value of
the share of agriculture in state GDP, average of commercial bank lending to
the agricultural sector relative to agricultural GDP during this period. The
dummy variable BIHAR is meant to capture Bihars relative performance
while BIMARUXBR is an added control to ensure that any Bihar eect
does not reect an overall eect from Bimaru states. Finally, we also have a
measure of rural literacy based on the National Family and Health Survey
reports for 2005.
We can see from the results that the lagged initial value of KCC credit
is not signicant in explaining KCC credit lending in 2009. In other words,
there was very little relation between states who received high levels of
credit in 2005 and those that received credit in 2009.
25
The lagged agricul-
tural productivity measure is present to check whether states that were more
productive initially were more likely to gain access to KCC credit. Again,
we see no evidence that this is true. Of course, it is possible that these states
had by 2005 had already received a lot of credit and hence their was very
little growth between 2005 and 2009. As a check, we dropped the lagged
initial value of KCC credit to see if that was indeed the case, and found
it did not alter the insignicance of initial agricultural productivity. The
lagged nominal agricultural share of output was included to see if states
with high agricultural output received better access to the KCC scheme
during the subsequent ve years. Indeed, we nd that is the case. This
is a positive development. Rural literacy does not seem to play a signif-
icant role in explaining which states gained more credit during this time
period. Finally, if we look at the dummy variables, then we see that both
BIHAR and BIMARUXBR are signicant in explaining the credit share in
2009. A comparison of the coecient size and the signicance suggests that
25
Looking back at gure 1, one might wonder whether this week relationship is because of
Pondicherry. However, Pondicherry ends up being excluded from the regressions anyways,
because we do not have rural literacy rates for 2005.
16
this result be taken with cautious optimism as far as Bihar is concerned.
Clearly, Bihar has done well during this time period. However, it seems
that other BIMARU states as a group have done better in implementing the
KCC scheme. In column (3), we modify the regression in two ways. First
we replace the lagged productivity variable by looking at yield instead of
output per worker. Second, we also add the average growth rate of GDP
per capita in states to control for the possibility that the strong Bihar and
BIMARU eects are simply not picking up the high growth rates that these
states experienced during this period. In other words, were the gains in
KCC simply a byproduct of high growth or did the states actually achieve
improvements that were orthogonal to the high growth rates? Column (2)
shows clearly that this is not a concern. The growth rate during that time
period is not signicant in explaining KCC credit in 2009, and both the
Bihar and BIMARU eects remain. A possible reason for this strong eect
might be that these states were late to adopt the KCC scheme. We know
that southern states as well as some others like Maharasthra implemented
the KCC scheme enthusiastically soon after its inception. On the other
hand the Bimaru states lagged in their adoption of the scheme. Thus, the
strong eect might simply be a proxy of being a late adopter. Finally, from
columns (1) and (2) it is patently clear that overall commercial bank credit
to agriculture is an important explanation for KCC credit in 2009. This is
not surprising since, from table 2, we have already seen that KCC credit
and commercial bank agricultural credit are strongly correlated.
In columns (3) and (4) we replace KCC amounts by the number of KCC
account holders. These regressions present some interesting contrasts. First
of all, the lagged values are extremely signicant in explaining current values.
It is important to remember that we are now talking about shorter time
periods, (2005-07 vs 2007-09) with at least one year of overlap. Figure (2)
already highlights the strong persistence across these two periods. Moreover,
the signicance of commercial bank credit now goes away, even though table
2 suggests a strong association between our measure of KCC account holders
and commercial bank credit. The role of initial productivity continues to
be unimportant and so does literacy. However, when it comes to Bihar and
other BIMARU states, we see something entirely dierent. Clearly Bihar
has made strong gains while other BIMARU states do not seem to have
made equivalent gains. Finally, in column (4) when we add the growth rate
as an additional control, Bihars strong gains continue to hold up.
Overall, the table seems to send a mixed message. When it comes to
actual credit amounts, the relative size of the agricultural sector and the
extent of agricultural credit seems to matter. However, when it comes to
17
the actual number of account holders, there is strong persistence. Taken
together this might imply that the reach of credit in terms of people being
included has not changed substantially. However the amount of credit has
changed over time. Finally, Bihar is an exception to both trends.
In Table 5, we redo the regressions with xed eects instead of ordinary
least squares. Instead of ve year averages, we now use annual data. Since we
have only a limited number of years, and many variables are lagged values,
we cannot undertake estimates for KCC account holders. Also, it is not
possible to control for Bihar or other Bimaru states. Finally, it is well known
that dynamic panel data models can produce biased estimates when using
xed eects. Therefore the results have to be interpreted with a sucient
level of caution. Looking at the table, we can see two important dierences
compared to the OLS results. First, the initial agricultural output share is no
longer important. Secondly, in column (2), with the previous years growth
rate thrown in, we see that yield becomes signicant at the ve percent
level. Overall, the xed eects regressions do not convey much information
beyond the role of commercial bank credit.
3.2.2 Growth Eects of KCC lending
The eects on GDP growth are shown in the next four tables. First, we
present some OLS results based on a standard cross section growth frame-
work as presented in equation (2). The rst three columns of table 6 present
the results when the KCC amount loaned is the independent variable, and
the next three columns present results when the account numbers are used
as a control. The other independent variables are the logarithm of the inital
value of the dependent variable, initial value of the share of agriculture in
total output, the average value of the relevant KCC variable during that
time period, and the average value of commericial bank credit relative to
output during that time period. For commercial bank credit, we use the
agricultural credit relative to agricultural output when the dependent vari-
ables are agricultural productivity and yield. We use total commercial bank
credit relative to state domestic product when the dependent variable is
state domestic product per capita growth. We also controlled for literacy
rates and plan expenditures as a share of state output in our initial estima-
tions, but since they were never signicant and we are already restricted to
twenty eight observations, we dropped them from the exercise.
Overall, the results are mostly disappointing. - neither KCC amount
loaned nor KCC accounts issued have any signicant eect whatsoever. This
is true irrespective of the dependent variable of interest. Furthermore, we
18
can also see that during this period there was no convergence dynamics at
play either. However, it is too short a period of time to make any realistic
inference regarding convergence. It is only with yield growth that we see
some signs of convergence. The only interesting result here is the role of
agriculture shares on subsequent economic growth. States that have had
low initial shares of agriculture have done well both in terms of subsequent
growth in overall GDP per capita and agricultural productivity. However,
this is not the case for yield. Normally, states with low initial shares of
agriculture would also be states with high initial levels of income. Therefore
this would be indicative of a divergence dynamic. However, since initial
income is already controlled for, it suggests that some other divergence dy-
namics might have been in play which are related to the structure of the
economy that is orthogonal to initial productivity.
In table 7, we ask a slightly dierent question. Going back to Nelson
and Phelps (1966), it has been argued that the ability for countries to play
catchup is largely dependent on its level of human capital. Since then this
literature has extended this concept to a wider set of variables applying
the phrase, absorptive capacities. These variables include property rights,
instituttions, nancial markets, trade policy, etc.
26
A natural extension for
this paper is to see if such non-linearities are also present in the case of KCC.
More specically, it would be interesting to know if the growth eects of KCC
lending have been asymmetrical across states. The literature on growth in
Indian states has highlighted the fact that states which were already rich in
the pre liberalization period did even better during the post liberalization
period. Given this background, we check whether the KCC scheme was
more benecial to states with higher initial levels of productivity. Since
the scheme was designed to benet the agricultural sector, we look at the
non linear eects on the agricultural productivity variables (and not overall
state output growth). Perusing through table 7, we can see there no obvious
role for such non linearities here. Neither KCC interacted with agricultural
output per worker, nor KCC interacted with initial yield is signicant. The
message from tables 6 and 7 clearly indicate that at least during this phase
KCC credit did not have any major growth eect.
27
In table 8, we revisit the BIMARU eect. Having already seen that the
BIMARU states outperformed other states in KCC penetration during this
period, we check to see if that is true for economic growth in general. The
results reect what we already know and also the correlations we have seen
26
See World Bank (2001).
27
We also did xed eect regressions but found no role for KCC there either.
19
in table 2. Clearly Bihars growth performance has been dierent from that
of other states. It is interesting to see that other BIMARU states have not
outperformed other states even though they did better with KCC lending.
In all fairness, since we have grouped all the other BIMARU states as one
dummy variable it is likely we are missing out on above average performance
for a subset of them. Interesting, Bihar is also a signicant underperformer
when it comes to agricultural gdp per worker growth while on yield, it
weakly overperforms. Thus for Bihar we have a troika of results that require
more research - signicant overperformance in KCC credit accompanied, by
average performance in yield but underperformance in agricultural labor
productivity.
28
Reverse Causation So far we have remained silent on the issue of reverse
causation. Needless to mention, ex-ante the potential of high agricultural
growth can increase the incentive for farmers to borrow from KCC or for
that matter any other lending vehicle. The problem of reverse causation is
well known in the nance and growth literature where this has largely been
handled by relying on exogenous variations in legal systems. Obviously, we
do not have that option for a very specic credit policy tool such as the KCC.
To address this issue, we constructed an instrument based on landholding.
A reading of the KCC documents such as the planning commissions 2002
report indicates that the success of the KCC scheme can be evaluated by
comparing the number of account holders to the number of eligible land-
holdings.
29
Thus, using data from the agricultural census, we constructed
a measure of landholdings relative to the rural population. A few clari-
cations are in order. First of all, one household may own more than one
landholding and hence this might be an overestimate. Secondly, the same
landholding might be subject to a number of distinct tracts that are owned
by various members of an extended family. In that case each of these house-
holds would be eligible for a card. The number of landholdings would then
underestimate potential borrowers. Thus measurement error might lead to
too high or too low a value. Secondly, even if we can use landholdings as an
28
One possibility that might be explored further is the role of the National Rural Em-
ployment Guarantee Act (NREGA). It is possible that by encouraging rural populations
to not migrate for better opportunities, it could have reduced agricultural productivity
and oset the positive eects of better credit. On the other hand easier access to short
term credit and more abundant supply of labor could have complementary eects on
agricultural productivity. We plan to investigate this further in future research.
29
In the 2002 report, the authors divide the total number of landholdings by two to eval-
uate the target penetration of KCC accounts. See Planning Commission (2002), section
3.3.2.
20
instrument, it may also aect agricultural growth directly and therefore one
would need to test its validity as an instrument. While landholdings can
be potentially used as an instrument for KCC account holders, we need a
dierent strategy if we wish to instrument KCC amounts being loaned. As
a crude proxy, we took the number of landholdings and multiplied that by
the all India average KCC amount being loaned. This gets rid of potential
state eects in calculating the amount. One of the advantages of using land-
holding data is that the last agricultural census took place in 2005, which is
right at the beginning of our period of analysis.
In addition to instrumenting KCC lending, we also need an instrument
for commercial bank credit. Burgess and Pande (2005) note that since lib-
eralization, in 1991, rural branch expansion had more or less stalled. We
exploit this stagnation and use branches per capita as an instrument for
commercial bank credit. For agricultural credit, we use rural branches per
rural person and for aggregate credit, we use total branches per person in
the state. We use numbers for 2005. It should be noted that 2005 was the
last year of stagnation. In fact in 2005, rural branches per capita was less
than what it was in 2001. With the renewed push for agricultural credit,
the data suggests a clear increase in branches per capita after 2006. For all
branches, rural and urban there is no such decline and hence the instrument
is likely to be less valid.
Unfortunately, just as in the OLS regressions, the instrumental variable
regressions also do not indicate any growth eect for KCC. Given the in-
signicance, we do not present the results here but quickly make a couple of
observations. First, table 9 lists some simple correlations between our two
instruments for KCC and some of the other key dependent and independent
variables. While the instruments themselves are strongly correlated, it is
clear that the imputed amount is not correlated with the actual amounts
being loaned. However, landholdings do exhibit a stronger correlation of 0.38
with KCC account holders. It is also positively correlated with the growth
variables and negatively correlated with initial productivity measures. Fi-
nally, it also exhibits a positive correlation with the credit variables. While
our second stage regressions were insignicant, we should mention that land-
holdings per rural person was invariably positive and signicant in the rst
stage. Nevertheless the test statistics indicated that our instruments were
only weakly identied. Of course, the problem is compounded by the fact
that we have only 27 observations.
21
3.3 District Level Analysis for Bihar
So far we have examined the relative performance of Bihar in the context
of other states. However, across the thirty eight districts of Bihar, there is
sucient variation in economic activity that it is worthwhile to examine the
same eects. Further, from a policy perspective, drilling down to a district
level allows us to uncover local dierences after controlling for both national
and state policies.
As discussed earlier in section 2, the data for KCC lending at the district
level comes primarily from SLBC documents. We use crop loans as a mea-
sure of amount loaned via the scheme and account holders as before. One
of the advantages of relying on SLBC documents, is that we have a slightly
longer span of data.
30
Unfortunately, at the district level we have much less
reliable data on value added and more so at the sectoral level. While the
government of Bihar has created data at the district level equivalent of net
domestic product, this is only available from 2004-05 to 2007-08. Further-
more, sectoral value added data is only available for 2004-05. We extrapolate
sectoral data up to 2007-08 based on the 2004-05 shares but obviously one
should be cautious given the fast pace of economic growth which usually
translates into rapid structural shifts. Therefore, we mostly rely on food-
grain productivity for which we have data from 2005-06 to 2009-10 from the
government of Bihars economic surveys. For measures of overall credit, we
have data on all loans from SLBC documents as well as advances. Its
not clear from the documents what the dierences are, but since the latter
is usually a larger number, we use that as our broad measure of credit.
31
We
rst begin, by looking at the evolution of the two variables, crop loans (as a
share of all advances) and accounts issued (relative to rural population) for
Bihar over as many years as possible. This is displayed in table 10. The rst
two columns are self explanatory. The third and fourth columns uses our
strategy of adding up KCC accounts issued over three years to get a better
sense of total number of account holders in existence. The third column
divides the number by rural population while the fourth divides it instead
by agricultural workers. As the numbers indicate, Bihar has made consider-
able progress over the decade. A major jump in the amount that was being
loaned seems to have happened between 2006-07 and 2007-08. Looking at
30
In principle, we have data going back to 2001 but since there is a danger that going
back that far might increase measurement error if we rely on crop loans. However, there
is no such danger for data on account holders.
31
Advances is used in the calculation of the credit-deposit ratio. During our period
of study it exceeded all loans by almost 50 to 100%.
22
the rest of the gures it is clear that this jump is based on an increase in
the credit limits rather than an increase in the number of people acquiring
accounts. Moreover, this is Bihar specic since there is no apparent jump
for India as a whole.
32
It is only in the next year, 2008-09, that we also see a
huge jump in the number of account holders relative to the rural population.
Figures (3) and (4) provide an overview of districtwise achievements of
crop loans relative to advances and account holders relative to the rural
population.
33
Using both measures, we see uniformly large gains across
the board. From gure (3) we can observe that the only districts with
declines are Kaimur, Munger and Purnea. Purnea and Kaimur had large
shares to begin with but did not make further gains. Munger is the only
district that experienced a sizeable decline from ten percent to six percent.
Signicant gains were achieved by a number of district but clearly Jehanabad
and Saharsa made noticeable strides. The former went from seven percent to
forty percent while the latter went from a measly three percent to thirty two
percent. Supaul also recorded similar gains. Finally, it should be obvious
that, Patna not being a rural district, did not show much gains. This applies
to Gaya as well. Figure (4) shows trends in KCC account holders. We
see similar across the board gains. Interestingly Kaimur which did not
experience an increase in the amount being loaned relative to all advances,
experienced a doubling in the population share of account holders.
As in the state level analysis, we rst visit the question of determinants
of KCC lending. We use two dependent variables - crop loans as a share of
district agricultural NDP and KCC accounts as a a share of the rural popu-
lation. Both are similar to the measures used in the state level regressions.
However, as we mentioned earlier district level NDP stops with 2007-2008
and hence we the period of study is limited to three years. This is not the
case with KCC account holders for which we have longer data and hence the
span is longer at six years. Like earlier we control for dierences in initial
values of the dependent variable, initial agricultural share of output, ini-
tial agricultural productivity, and initial credit to district GDP ratio. The
results are displayed in table 11. In the state level analysis, we saw that
whether we use agricultural output per worker and foodgrain yield seems
to have asymmetric eects on econometric estimattes. Hence we alternate
between the two as our initial measure of productivity. From the table we
can see that with both dependent variables, their initial values are mostly
32
We have also checked to rule out the possibility that advances might have gone down.
The actual amount of crop loans doubled between these two years.
33
The district codes are provided in appendix 4.
23
signicant. However, there are some important dierences. If we look at the
size of the coecient, then we can see from column (3) that the initial value
of KCC account holders is less than one. In other words, when it comes to
account holders there is evidence of conditional convergence. However, when
it comes to crop loan shares, the coecient size is greater than 1. Therefore,
the latter exhibits divergence. In other words, while district level inequali-
ties in the number of people with access to credit was declining, inequality
in the amount of credit was increasing. However, the crop loan to output
ratio data ends with 2007-08 so it is dicult to know whether this was just
a temporary development. Other than initial values, we can see from the
tables, that low initial agricultural output shares and low initial yield were
associated with larger crop loan shares three years later. Finally, from the
R-squares, one can see that we do much a better job of explaining loan to
GDP ratios than account holders.
One of the more sensitive issues about KCC lending has been the blame
game between the state government of Bihar and the commercial banks.
State leaders are often vocal about the lack of enthusiasm showed by com-
mercial bank lenders. There is no doubt that some of the reluctance on the
part of the commercial bank lenders is the fear of default which they believe
to be very high. From our conversations with many bank ocials it was
clear that borrowers often consider the money to be a grant. This feeling
of entitlement is further accentuated by the fact that borrowers often have
to pay a bribe to get the loan approved.and hence believe that the money
does not have to be returned.
34
The second problem as we discussed already
is the fact that multiple accounts are held by the same borrower through
dierent banks. Bihar is also dierent even from neighboring Uttar Pradesh
as the land records have not been digitized. As a result it is easy to bribe
the local ocial and claim multiple ownerships of the same piece of family
land. This is particularly true in extended families all of which claim rights
to dierent but also overlapping portions of the same swathe of inherited
land. One of the constant gripes of the government has been the fact that
commercial bank ocials do not show up at government organized camps.
These government organized camps are held to implement mass enrollment
in the KCC scheme. Commercial bank ocials counter this allegation by
indicating that these camps are held in the late morning hours when it is
34
The fact that bribes are charged for KCC loan approval is indicative of the desirability
of these loans. Indeed, it was found that it was easier to pay a eld ocer (who approves
the land certicate), ve thousand rupees to handle the paper work. Furthermore, because
of KCCs low rates of interest, those who could borrow money were becoming the new
money lenders to those ineligible for the account. See Singh (2008).
24
dicult to send a loan ocer away from branch banking duties and it is
easier to do this in the afternoon. Obviously underlying this blame game
is the fact that there is a fear of default given that it is easy to provide
counterfeit documents.
In this context, we decided to check if certain banks were better at giving
KCC loans than others. One of the key features of the Indian nationalized
banking system is the appointment of a lead bank in every district. Usually
this bank will have the largest number of branches within that district. For
any econometric exercise this has an added benet that the lead banks in
Bihar are large national banks that were allocated their districts back during
the nationalization era. Therefore, their location is not a consequence of the
KCC scheme. In Bihar, the largest lead banks are Punjab National Bank,
Central Bank of India, State Bank of India,and UCO bank with responsi-
bilities for 12, 10, 7 and 4 districts respectively.
35
To test if the lead bank
matters in the rate of KCC adoption, we created dummy variables for each
of these four banks and reestimated the regressions in table 11. The results
are presented in table 12. Adding four more variables obviously reduces the
degree of freedom and hence one needs to be cautious in interpreting the
results. Looking at both measures of KCC adoption, the evidence is weakly
supportive of Punjab National Bank having a positive eect. And while the
other three banks have a negative coecient, it is not signicant.
3.3.1 KCC and Growth Across Districts
Finally, we revisit the question of agricultural growth and KCC lending. Our
dependent variable is foodgrain productivity and we examine the period
2005-06 to 2009-10 (ie the same as that for the state level analysis). As
independent variables, we use KCC accounts issued issued over three years
relative to the rural population, and the share of crop loans in advances (even
though ideally we would like to use crop loans as a share of net domestic
product). As control variables, we use initial value of foodgrain productivity,
initial share of agricultural output in district NDP, the credit-deposit ratio
and logarithm of average rainfall over the period and rainfall squared. The
last two variables were chosen since agricultural production in Bihar is still
very dependent on rainfall. However excess rainfall means oods, and hence
we also included the square term. We rst look at the pairwise correlations
for these variables in table 13. The simple correlation between foodgrain
yield growth and the KCC variables is negative for account holders, and near
35
Other banks with one or two branches each are Bank of Baroda, Canara Bank, and
Union Bank.
25
zero for crop loans. This is obviously discouraging. The two KCC variables
themselves are correlated at 0.35 which is not too high itself. Finally, and
contrary to what one might expect, initial share of agriculture in output
and the cd-ratio are positively correlated. One would have expected this
correlation to be negative. Finally, the rain variables are strongly correlated
between themselves and are also strongly correlated with the cd-ratio and
of course the share of agriculture.
The regression results are reported in table 14. Irrespective of our choice
of KCC measure, there is no evidence again that it had any eect on agri-
cultural productivity. Moreover, coecients of both KCC variables appear
with a negative sign. This is not surprising in itself since we saw at least the
KCC accounts relative to rural population ratio was negatively correlated
with the growth rate. As a double check, we ran an additional regression
using growth in agriucltural productivity for the 2004-05 to 2006-07 time
period despite the shorter time span. Here too, we saw no eect of KCC
account holders. Returning to the negative insignicant eects of KCC on
yield growth, we created some scatter plots to get a sense of the relationship.
These are shown in gures (5) and (6) respectively. The negative relation-
ship between KCC accounts per rural person and yield growth during this
time period is quite apparent and so is the lack of any correlation between
crop loans and yield At least based on these regressions, we are yet to see
any strong benet of the KCC Scheme on agricultural productivity growth.
4 Conclusion
The KCC scheme has been in eect now for around thirteen years. Over
this period it has become the main, if not only vehicle of short term credit
to agriculture and also increasingly as a source of investment and consump-
tion needs of farmers. Given the long period of its existence and the push
by the government at various levels, one would have expected to see some
real eects by now. Unfortunately, we do not nd any indication that the
scheme has increased either agricultural labor productivity or land produc-
tivity. While this result is disappointing, it needs to be placed in context.
First of all, despite the length of the scheme, we have been handicapped in
our data for several reasons. First of all, at the state level , we do not have
KCC data preceding 2005. As a result we miss out on the initial surge of
accounts that some early adopters experienced. Secondly, in dealing with
a sample of only twenty eight states, any result would be necessarilly frag-
ile. Third, since the credit is for short term needs and does not reect long
26
term investments, it is possible that it may have lead to reduced volatility
in growth rates. Unfortunately we do not have enough observations to un-
dertake this analysis. Moreover, it is possible that given the low interest
rate that is oered for these loans, and the anecdotal evidence on borrowers
making arbitrage gains, that these loans are being used to nance consump-
tion mroe than actual agricultural needs. To get a better answer to these
questions, it would be ideal to combine district level lending data with dis-
trict level consumption data available from sources such as the National
Sample Survey, and also district level yield data that should be available
with various states. Needless to mention this would be a much more am-
bitous research agenda that is beyond the scope of this project. Nevertheless
given the amount of resources that the central and state governments have
devoted to this scheme, it is important to know whether there have been
actual payos.
36
Also, it is important to know whether this scheme has
actually reduced transaction costs for banks, and their default rates.
Returning to the results here, we can summarize, two overall themes.
First, there is very little systematic relationship between the extent of KCC
lending and characteristics of the agricultural sector at the state level. In
otherwords, initial agricultural productivity, share of agricultural output etc
do not provide any indicator of the extent of KCC implementation. The only
strong correlation is the extent of nancial sector development however this
might reect some inbuilt double-counting. Looking at the strong eect of
Bihar and other BIMARU states, the main conclusion that one can draw,
is that the degree of KCC adoption largely depends on state specic factors
that are uncorrelated to their agricultural sector. Though dicult to test
statistically, one can conjecture that this reects a political will than any
economic variable. At the district level, we nd that over the ve year
period in Bihar, the only strong predictor of KCC growth, is initial KCC.
There has been convergence in terms of accounts issued across districts- a
positive outcome but divergence in terms of actual amount of crop loans, a
potentially worrying outcome. The results nevertheless needs to be treated
with caution since the sample is only of thirty eight districts.
Finally, we reect briey on some of the discussions that we have had
with bank and government ocials regarding KCC adoption in Bihar. The
sense that one got from both parties is the willingness and desire to adopt
the scheme mainly because of its simplicity and potential benets to the
36
Surveys which show that farmers are happy with the scheme are useful. However, pre-
sumable any borrower would be happy with a loan with such low interest rates. Therefore,
one needs more objective data to evaluate the success of the scheme.
27
farmers. Nevertheless the same simplicity and attractive features creates
the possibility of fraud and hence some obvious inertia by commercial banks.
As with any market with information asymmetry, it is likely that borrowers
who either have strong ties with their banks or can easilly prove their ability
to repay the loans are already participating in the scheme. Hence most of
the remaining borrowers are ones that are likely to have diculty in proving
their creditworthiness. One possibility at this time, is to start digitizing
land records to reduce the chance of fraud. However, it is not clear to what
extent the state government has the capacity to accelerate this process.
Perhaps a more reasonable route might be to accelerate the issuance of
unique identication cards (Adhar). Since the central government too is
more investted in this scheme, it might be faster to implement. Once such
cards are available banks can potentially use them to cross check with local
banks to rule out the possibility of multiple accounts for one person.
References
[1] Banerjee, Abhijit V & Newman, Andrew F, 1993, Occupational Choice
and the Process of Development, Journal of Political Economy, Univer-
sity of Chicago Press, vol. 101(2), pages 274-98, April
[2] Beck, Thorsten, Ross Levine and Norman Loayza, 2000, Finance and
the sources of growth, Journal of Financial Economics, Elsevier, vol.
58(1-2), pages 261-300.
[3] Burgess, Robin, & Rohini Pande, 2005, Do Rural Banks Matter? Evi-
dence from the Indian Social Banking Experiment, American Economic
Review, American Economic Association, vol. 95(3), pages 780-795,
June.
[4] Cole, Shawn, 2009,. Financial Development, Bank Ownership, and
Growth: Or, Does Quantity Imply Quality?, The Review of Economics
and Statistics, MIT Press, vol. 91(1), pages 33-51, October.
[5] Galor, O., Zeira, J., 1993, Income Distribution and Macroeconomics,
Review of Economic Studies 60, 3552
[6] Ghani, Ejaz, Lakshmi Iyer, and Saurabh Mishra, 2010, Are Lagging
Regions Catching up with Leading Regions?, in Ejaz Ghani ed., The
Poor Half Billion in South Asia, Oxford University Press., Chapter 3,
pp 64-89.
28
[7] Ghosh, Saibal, 2009, Does Financial Outreach Engender Economic
Growth? Evidence from Indian States, Munich Personal RePEc Archive
Paper No. 32072.
[8] Greenwood, J., Jovanovic, B., 1990. Financial Development, Growth
and the Distribution of Income, Journal of Political Economy, 98:5,
Part 1: 10761107
[9] Kendall, Jake, 2009, Local Financial Development and Growth, Policy
Research Working Paper No. 4838, The World Bank - Financial and
Private Sector Vice Presidency, Washington, D.C.
[10] King, Robert and Ross Levine, 1993, Finance, Entrepreneurship and
Growth: Theory and Evidence, Journal of Monetary Economics, 32:
513-542.
[11] Kochhar, Kalpana & Kumar, Utsav & Rajan, Raghuram & Subra-
manian, Arvind & Tokatlidis, Ioannis, 2006, Indias pattern of develop-
ment: What happened, what follows?, Journal of Monetary Economics,
Elsevier, vol. 53(5), pages 981-1019, July
[12] Kumar, Utsav and Arvind Subramanian, 2011, Indias Growth in the
2000s: Four Facts, Working Paper Series WP 11-17, Peterson Institute
for International Economics, Washington, D.C.
[13] Mankiw, G.N., Romer, D., Weil, D.N., 1992. A Contribution to the
Empirics of Economic Growth, Quarterly Journal of Economics, 407
437.
[14] Levine, Ross, Norman Loayza and Thorsten Beck, 2000, Financial in-
termediation and growth: Causality and Causes, Journal of Monetary
Economics, 46: 31-77.
[15] Nelson, R. and Phelps, E.,1966, Investment in Humans, Technological
Diusion, and Economic Growth. American Economic Review, 56, 69-
75
[16] Planning Commission, 2002, Support From the Banking System -
A Case Study of Kisan Credit Card, Study Report No. 146, Socio-
Economic Research Division, New Delhi, India
[17] Ramakumar,R., and Pallavi Chavan, 2007, Revival of Agricultural
Credit in the 2000s: An Explanation, Economic and Political Weekly,
December 29, p57-63.
29
[18] Samantara, Samir, 2010, Kisan Credit Card - A Study, Occasional
Paper No. 52, National Bank of Agriculture and Rural Development
(NABARD), Mumbai.
[19] Sharma, Anil, 2005, The Kisan Credit Card Scheme: Impact, Weak-
nesses and Further Reforms, National Council of Applied Economic
Research (NCAER), New Delhi.
[20] Singh, Chandra Shekhar, 2008, Kisan Credit Card on Sale in Rural
Areas, http://www.merinews.com, March 18.
[21] Reserve Bank of India, 2004, Communication - Scheme to cover term
loans for agriculture & allied activities under KCC, RBI/2004-05/204,
Mumbai.
[22] World Bank, 2001, Global Development Finance Report,. The World
Bank, Washington, DC.
30
Figure 1: Growth in KCC Credit Relative to Agricultural GDP (2005-06 to
2009-10)
IN
JK
HP
PB
UK
HR
RJ
UP
BR
SK
AR
MZ
TR
ML AS
WB
JH
OR
CG
MP
GJ
MH
AP
KA
GA
KL
TN
PY
AN
0
.
0
5
.
1
.
1
5
.
2
.
2
5
K
C
C

C
r
e
d
i
t
/

A
g
r
i
c
u
l
t
u
r
a
l

G
D
P

(
2
0
0
9
)
0 .1 .2 .3
KCC Credit/ Agricultural GDP (2005)
Figure 2: KCC Account Holders Relative to Rural Population
IN
JK
HP
PB
UK HR
RJ
UP
BR
SK AR
MZ
TR
ML
AS
WB
JH
OR
CG
MP
GJ
MH
AP
KA
GA
KL
TN
PY
AN
0
.
0
2
.
0
4
.
0
6
.
0
8
K
C
C

A
c
c
o
u
n
t
s
/

R
u
r
a
l

P
o
p
u
l a
t
i o
n

(
2
0
0
7
-
2
0
0
9
)
0 .02 .04 .06 .08
KCC Accounts/ Rural Population (2005-2007)
31
Figure 3: District Level Progress in KCC Lending (Crop Loans, 2004-05 vs
2010-11)
BR
PA
NL
BO
BU
RO KM
GA
JE
AW
NW
AU
SR
SW
GO
WC
EC
MZ
SI
SO
VA
DA
MB
SM
BE
MU
SH
LA
JA
KH
BH
BA
SA
SU
MP
PU
KI
AR
KT
.
1
.
2
.
3
.
4
C
r
o
p

L
o
a
n
/
A
d
v
a
n
c
e
s

(
2
0
1
0
)
0 .05 .1 .15 .2 .25
Crop Loans/ All Loans (2004)
Figure 4: District Level Progress in KCC Lending (Account Holders, 2004-05
vs 2010-11)
BR
PA
NL
BO
BU
RO
KM
GA
JE
AW
NW
AU
SR
SW
GO
WC
EC
MZ
SI
SO
VA
DA
MB
SM
BE
MU
SH
LA
JA
KH
BH
BA
SA
SU
MP
PU
KI
AR
KT
.
0
2
.
0
3
.
0
4
.
0
5
.
0
6
K
C
C

A
c
c
t
s

(
3

y
r
s
)
/
R
u
r
a
l

P
o
p
u
l
a
t
i
o
n

(
2
0
1
0
)
0 .01 .02 .03 .04
KCC Accts (3 yrs)/Rural Population (2004)
32
Figure 5: Growth in Foodgrain Yield vs KCC Accounts (2005-06 to 2009-10)
BR
PA
NL
BO
BU
RO
KM
GA
JE
NW
AU
SR
SW
GO
WC
EC
MZ
SI
SO
VA
DA
MB
SM
BE
MU
SH
LA
JA
KH
BH
BA
SA
SU
MP
PU
KI
AR KT
-
.
1
0
.
1
.
2
.
3
G
r
o
w
t
h

i
n

F
o
o
d
g
r
a
i
n

Y
i
e
l
d
.01 .015 .02 .025 .03 .035
KCC Accounts / Rural Population
Figure 6: Growth in Foodgrain Yield vs Crop Loan Share, 2005-06 to 2009-
10
BR
PA
NL
BO
BU
RO
KM
GA
JE
NW
AU
SR
SW
GO
WC
EC
MZ
SI
SO
VA
DA
MB
SM
BE
MU
SH
LA
JA
KH
BH
BA
SA
SU
MP
PU
KI
AR KT
-
.
1
0
.
1
.
2
.
3
G
r
o
w
t
h

i
n

F
o
o
d
g
r
a
i
n

Y
i
e
l
d
0 .1 .2 .3 .4
Crop Loans / All Advances
33
34


Appendix 1
Data Sources for Inter-State Analysis

Variable Data Source
State Net Domestic Product (SNDP)
and Population
Reserve Bank of India, Handbook of Statistics on
the Indian Economy

State Net Domestic Product in
Agriculture
Reserve Bank of India, Handbook of Statistics on
the Indian Economy

Agricultural Labor Force (to calculate
Agr. SNDP per worker)
Agricultural Work Force as a share of Rural
Population based
on 2001 Census applied to subsequent years

Foodgrain Yield per Hectare Agricultural Statistics at a Glance (Ministry of
Agriculture) and Indiastat.com
All Outstanding Credit of Scheduled
Commercial Banks
Reserve Bank of India, Basic Statistical Returns,
Table 4.9

Agricultural Outstanding Credit of
Scheduled Commercial Banks
Reserve Bank of India, Statistical Tables Related to
Banking in India,
Table 6.2

Kisan Credit Card - Amount and
Number of Account
Reserve Bank of India, Trend and Progress of
Banking in India, Appendix Table V.10
(also includes data by bank type- Commercial,
Regional Rural and Cooperative)

Literacy Rate, 2005 National Family and Health Survey, 2005.

35

Appendix 2
Data Sources for Bihar Inter-District Analysis

Variable Data Source

Crop Loans (KCC) State Level Banker Committee Reports (Bihar)

KCC Accounts State level Banker Committee Reports (Bihar)

Advances (Credit) State Level Banker Committee Reports (Bihar)

Credit-Deposit Ratio State Level Banker Committee Reports (Bihar)

District-wise NDP Directorate of Statistics and Evaluation,
Government of Bihar

District-wise NDP in Agriculture Directorate of Statistics and Evaluation,
Government of Bihar

Foodgrain Yield Bihar Economic Survey, Govt of Bihar

Rainfall Directorate of Statistics and Evaluation,
Government of Bihar

36

Appendix 3
State Codes

State/Union Territory
Name
Two
Letter Code
2011 Census
Code
Andaman & Nicobar AN 35
Andhra Pradesh AP 28
Arunachal Pradesh AR 12
Assam AS 18
Bihar BR 10
Chandigarh CH 04
Chattisgarh CG 22
Dadra and Nagar Haveli DN 26
Daman & Diu DD 25
Delhi DL 07
Goa GA 30
Gujarat GJ 24
Haryana HR 06
Himachal Pradesh HP 02
India IN 0
Jammu & Kashmir JK 01
Jharkhand JH 20
Karnataka KA 29
Kerala KL 32
Lakshadweep LD 31
Madhya Pradesh MP 23
Maharashtra MH 27
Manipur MN 14
Meghalaya ML 17
Mizoram MZ 15
Nagaland NL 13
Orissa OR 21
Pondicherry PY 34
Punjab PB 03
Rajasthan RJ 08
Sikkim SK 11
Tamil Nadu TN 33
Tripura TR 16
Uttar Pradesh UP 09
Uttarakhand UK 05
West Bengal WB 19

37

Appendix 4
Bihar District Codes

District
No.
District
Name
Two
Letter
Code
District
No.
District
Name
Two
Letter
Code
37 Araria AR 34 Madhepura MP
9 Arwal AW 22 Madhubani MB
11 Aurangabad AU 25 Munger MU
31 Banka BA 17 Muzaffarpur MZ
24 Begusarai BE 2 Nalanda NL
30 Bhagalpur BH 10 Nawada NW
3 Bhojpur BO 1 Patna PA
4 Buxar BU 35 Purnia PU
21 Darbhanga DA 5 Rohtas RO
16 East Champaran EC 32 Saharsa SA
7 Gaya GA 23 Samstipur SM
14 Gopalganj GO 12 Saran SR
28 Jamui JA 26 Sheikhpura SH
8 Jehanabad JE 19 Sheohar SO
6 Kaimur KM 18 Sitamarhi SI
38 Katihar KT 13 Siwan SW
29 Khagaria KH 33 Supaul SU
36 Kishanganj KI 20 Vaishali VA
27 Lakhisarai LA 15 West Champaran WC
0 Bihar BR

38


Table 1: Summary Statistics for Selected Variables
(2005-06 to 2009-10 Averages)

Variables Mean Std. Dev. Min Max India Bihar
RNSDP pc
Growth

0.07 0.022 0.0336 0.118 0.069 0.074
Agr. NSDP
pw Growth
0.037 0.039 -0.033 0.100 0.037 0.00
Yield Growth 0.006 0.046 -0.129 0.073 0.012 0.038
Comm. Bank
Credit /GDP
0.394 0.187 0.154 1.002 0.6 0.25
Comm. Bank Agr
Credit / Agr.
NSDP
0.381 0.315 0.054 1.46 0.5 0.23
KCC Credit
/Comm Bank
Credit
0.015 0.0124 0.001 0.043 0.012 0.03
KCC Credit /
Comm Bank Agr
Credit
0.099 0.042 0.011 0.175 0.09 0.15
KCC Credit/
Agr NSDP Ratio
0.063 0.042 0.008 0.136 0.084 0.059
KCC Accts/
Rural Popn
0.027 0.019 0.003 0.080 0.031 0.018


39

Table 2: Correlations Between Selected Variables
(2005-06 to 2009-10 Averages)


RNSDP
pc
Growth

Agr.
NSDP
pw
Growth
Yield
Growth
Comm.
Bank
Credit
/ GDP
Comm.
Bank
Agr
Credit
/Agr.
NSDP
KCC
Credit/
Comm
Bank
Credit
KCC
Credit
/Comm
Bank
Agr
Credit
KCC
Credit/
Agr
NSDP
Ratio
KCC
Accts/
Rural
Popn
RNSDP pc
Growth

1.00

Agr. NSDP
pw Growth
0.36 1.00

Yield
Growth
0.00 -0.01 1.00

Comm.
Bank
Credit/GDP
0.40 0.14 -0.03 1.00

Comm.
Bank Agr
Credit/
Agr. NSDP
0.49 0.14 0.04 0.49 1.00

KCC
Credit/
Comm
Bank
Credit
-0.07 -0.44 0.17 -0.10 0.05 1.00

KCC
Credit/
Comm
Bank Agr
Credit
-0.10 -0.26 0.21 -0.28 -0.22 0.79 1.00

KCC
Credit/
Agr NSDP
0.38 0.10 -0.03 0.34 0.74 0.26 0.07 1.00

KCC Accts/
Rural Popn
0.39 -0.04 0.06 0.48 0.68 0.53 0.24 0.71 1.00


40

Table 3: KCC by Source of Credit (2005-06 vs 2009-10)

Commercial
Bank Share
Rural
Regional
Bank
Share
Cooperative
Bank Share
Commercial
Bank Share
Rural
Regional
Bank
Share
Cooperative
Bank Share
2005-06 2009-10
India 0.39 0.18 0.43 0.69 0.18 0.13
Bihar 0.68 0.32 0 0.63 0.35 0.02
Andhra
Pradesh
0.78 0.19 0.03 0.88 0.12 0.00
Kerala 0.46 0.10 0.42 0.41 0.15 0.44


41

Table 4: Determinants of KCC lending
OLS Regressions
Dependent Variables
KCC Credit/Agri. NSDP,
2009
KCC Accts/Rural Population
(2007-2009 aggregate)
1 2 3 4
Independent
Variables

KCC Credit/
Agri. NSDP, 2005
0.122
(0.075)
0.119
(0.078)

KCC Accts/
Rural Pop.
(2007-09)
0.871***
(0.109)
0.901***
(0.104)
Log Agri. NSDP /
Worker, 2005

-0.008
(0.009)
-0.001
(0.004)

Log Yield,
2005
-0.016
(0.018)


-0.004
(0.006)
Agri NSDP/
State NSDP,
2005
0.218**
(0.079)
0.235**
(0.1)
0.036
(0.03)
0.04
(0.027)
Literacy Rate,
2005
0.001
(0.001)
0.001
(0.001)
0.000
(0.000)
0.000
(0.000)
RNSDP pc Growth
(2005-09)
-0.027
(0.268)
-0.021
(0.062)
Comm. Bank Agr
Credit/ Agr.
NSDP,
2005
0.076***
(0.018)
0.079***
(0.021)
0.001
(0.009)
0.001
(0.009)
BIHAR 0.023*
(0.011)
0.029**
(0.014)
0.007**
(0.002)
0.009**
(0.004)
BIMARUXBR 0.04***
(0.011)
0.039***
(0.011)
0.002
(0.003)
0.001
(0.003)
Constant -0.127
(0.116)
0.041
(0.1)
-0.033
(0.046)
0.006
(0.034)
R-squared 0.716 0.718 0.864 0.867
Number of
observations
26 26 26 26



42

Table 5: Determinants of KCC lending
Fixed Effect Regressions (2005-06 to 2009-10)
Dependent Variable: KCC Credit/Agri. NSDP

1 2
KCC Credit/ Agri.
NSDP, (t-1)
-0.501
(0.333)
-0.487
(0.306)
Log Agri. NSDP /
Worker, (t-1)
0.007
(0.055)

Log Yield,
(t-1)
0.069**
(0.03)
Agri NSDP/
State NSDP,
(t-1)
-0.221
(0.684)
-0.22
(0.55)
RNSDP pc Growth
(t-1)
-0.068
(0.076)
Comm. Bank Agr
Credit/ Agr. NSDP,
(t-1)
0.116**
(0.054)
0.15***
(0.036)
Constant 0.14
(0.419)
-0.426
(0.278)
R-squared
within:
between:
overall:

0.196
0.003
0.024

0.264
0.021
0.047
Number of observation 86 86



43

Table 6: Growth Effects of KCC
OLS Regressions (2005-06 to 2009-10 averages)

Dependent Variables
RNSDP
pc
Growth
Agr. NSDP
pw Growth
Yield
Growth
RNSDP
pc
Growth
Agr. NSDP
pw Growth
Yield
Growth
1 2 3 4 5 6
Log RSNDP
pc , 2005-06
0.004
(0.01)
0.001
(0.009)

Log Agr. NSDP
pw, 2005-06
-0.015
(0.01)
-0.013
(0.01)

Log Yield,
2005-06
-0.041*
(0.022)
-0.034*
(0.017)
Comm. Bank
Credit/GDP
2005-06 to 09-10
0.012
(0.019)
0.03**
(0.014)

Comm. Bank
Agr
Credit/ Agr.
NSDP,
2005-06 to 09-10
0.005
(0.029)
0.057
(0.047)
-0.023
(0.036)
0.05
(0.045)
KCC
Credit/Agri.
NSDP
0.158
(0.105)
-0.106
(0.237)
-0.2
(0.319)

KCC
Accts/Rural
Population
0.233
(0.149)
0.303
(0.547)
-0.33
(0.556)
Share of Agri.
in NSDP,
2005-06
-0.14**
(0.059)
-0.252*
(0.123)
0.202
(0.149)
-0.137**
(0.058)
-0.295**
(0.111)
0.169
(0.127)
Constant 0.103*
(0.051)
-0.008
(0.066)
0.264
(0.155)
0.087*
(0.049)
0.006
(0.064)
0.219*
(0.124)
R-squared 0.457 0.243 0.111 0.425 0.247 0.107
Number of
observations
28 28 29 28 28 29


44

Table 7: Interaction Effects of KCC
OLS Regressions (2005-06 to 2009-10 averages)
Dependent Variables
Agr. NSDP
pw Growth
Yield Growth Agr. NSDP
pw Growth
Yield Growth
1 2 3 4 5 6 7 8
Log Agr. NSDP
pw, 2005-06
-0.015
(0.01)
-0.032
(0.019)
-0.013
(0.01)
-0.01
(0.018)

Log Yield,
2005-06
-0.041*
(0.022)
-0.076*
(0.042)
-0.034*
(0.017)
-0.091*
(0.044)
Comm. Bank
Agr Credit/ Agr.
NSDP
0.005
(0.029)
-0.007
(0.029)
0.057
(0.047)
0.04
(0.056)
-0.023
(0.036)
-0.023
(0.036)
0.05
(0.045)
0.052
(0.047)
KCC Credit
/Agri. NSDP,
2005/6-09/10
-0.106
(0.237)
2.166
(2.329)
-0.2
(0.319)
-4.292
(3.898)

KCC Accts/
Rural Popn.
2005/6-09/10
0.303
(0.547)
-0.433
(3.582)
-0.33
(0.556)
-18.62
(12.107)
KCC Credit/
Agri. NSDP x
Log Agr. NSDP
pw
0.355
(.0365)

KCC Accts /
Rural Popn
x Log Agr.
NSDP pw
-0.122
(0.607)

KCC Credit/
Agri. NSDP x
log yield
0.566
(0.548)

KCC Accts/
Rural Popn
x log yield
2.401
(1.56)
Share of Agri.
in NSDP,
2005-06
-0.252*
(0.123)
-0.292**
(0.126)
0.202
(0.149)
0.155
(0.171)
-0.295**
(0.111)
-0.292**
(0.116)
0.169
(0.127)
0.145
(0.129)
Constant -0.008
(0.066)
-0.105
(0.107)
0.264
(0.155)
0.534
(0.322)
0.006
(0.064)
0.023
(0.107)
0.219*
(0.124)
0.655*
(0.34)
R-squared 0.243 0.265 0.111 0.134 0.247 0.248 0.107 0.157
Number of
observations
28 28 29 29 28 28 29 29

45


Table 8: KCC and Economic Growth- Is Bihar Different?
OLS Regressions (2005-06 to 2009-10 averages)
Dependent Variables
RNSDP pc
Growth
Agr. NSDP
pw Growth
Yield
Growth
RNSDP
pc
Growth
Agr. NSDP
pw Growth
Yield
Growth
1 2 3 4 5 6
Log RSNDP
pc , 2005-06
0.035**
(0.016)
0.035**
(0.014)

Log Agr. NSDP
pw, 2005-06
-0.033***
(0.011)
-0.033***
(0.011)

Log Yield,
2005-06
-0.02
(0.022)
-0.019
(0.023)
Comm. Bank
Credit/GDP
2005-06 to 09-10
0.033*
(0.018)
0.036**
(0.014)

Comm. Bank
Agr
Credit/ Agr.
NSDP,
2005-06 to 09-10
0.03
(0.029)
0.03
(0.041)
0.02
(0.033)
0.027
(0.04)
KCC
Credit/Agri.
NSDP,
2005/6-09/10
0.072
(0.119)
-0.167
(0.282)
-0.111
(0.341)

KCC
Accts/Rural
Population
2005/6-09/10
0.192
(0.164)
-0.134
(0.583)
-0.173
(0.586)
BIHAR 0.042***
(0.013)
-0.049**
(0.019)
0.021
(0.014)
0.042***
(0.012)
-0.047**
(0.018)
0.022*
(0.011)
BIMARUXBR 0.016
(0.017)
-0.032
(0.025)
0.019
(0.025)
0.019
(0.014)
-0.038*
(0.02)
0.015
(0.02)
constant 0.252**
(0.093)
-0.154**
(0.063)
0.015
(0.176)
0.249***
(0.086)
-0.016**
(0.064)
0.136
(0.18)
R-squared 0.478 0.27 0.095 0.49 0.26 0.094
Number of
observations
28 28 29 28 28 29


46

Table 9: Instrumental Variables and Pairwise Correlations

Landholdings/
Rural Population
(2005-06)
Imputed KCC
Amt/
Agricultural GDP
(2005-06)


Imputed KCC Amt/
Agricultural GDP
0.64 -
KCC Accts
/Rural Population
2005/6-09/10
0.38 0.26
KCC Credit
/Agri. NSDP,
2005/6-09/10
0.26 0.12
RNSDP pc Growth
2005/6-09/10
0.26 0.13
Log RSNDP pc,
2005-06
-0.20 -0.64
Agr. NSDP pw Growth,
2005/6-09/10
0.18 0.02
Log Agr. NSDP pw,
2005-06
-0.25 -0.61
Yield Growth,
2005/6-09/10
0.01 0.22
Log Yield,
2005-06
-0.26 -0.48
Comm. Bank
Credit/GDP
2005/06 09/10
0.40 0.05
Comm. Bank Agr
Credit/ Agr. NSDP,
2005/06 09/10
0.27 0.04


47


Table 10: KCC Progress in Bihar

Year Crop
Loans/
Advances
KCC
Accts/
Rural
Population
KCC Acct
(3 yr )/
Rural
Population
KCC
Acct (3
yr)/ Agr.
Workers
2001-02 - 0.006 - -
2002-03 - 0.004 - -
2003-04 - 0.008 0.017 0.059
2004-05 0.085 0.006 0.017 0.060
2005-06 0.068 0.004 0.017 0.059
2006-07 0.065 0.005 0.014 0.049
2007-08 0.118 0.006 0.014 0.048
2008-09 0.138 0.010 0.020 0.070
2009-10 0.162 0.012 0.027 0.094
2010-11 0.175 0.015 0.037 0.126


48

Table 11: Determinants of KCC Lending
Bihar Districts



Dependent Variable

KCC Accts/
Rural Population
(2010-11)
Crop Loans/
Agricultural
NDDP
(2007-08)
1 2 3 4
KCC Accts/
Rural
Population
(2004-05)
0.197
(0.12)
0.214*
(0.126)

Crop
Loans /
Agricultural
NDDP
(2004-05)


1.391***
(0.389)
1.319***
(0.379)
Log Agr.
NDDP pw,
2004-05
0.009
(0.006)

-0.075**
(0.034)
Log
Foodgrain
Yield,
2005-06

0.008
(0.005)
-0.055*
(0.027)

Share of
Agri.
in NDDP,
2004-05
-0.006
(0.015)
0.007
(0.014)
-0.14*
(0.071)
-0.059
(0.094)
Credit/NDDP
2004-05
0.021
(0.048)
-0.02
(0.05)
0.128*
(0.209)
-0.133
(0.186)
Constant
-0.052
(0.049)
-0.025
(0.039)
0.469**
(0.176)
0.775**
(0.287)
R-squared 0.167 0.171 0.541 0.532
Number of
observations
38 37 37 38




49

Table 12: Determinants of KCC Lending Does the Lead Bank Matter?
Bihar Districts
Dependent Variable
KCC Accts/
Rural Population
(2010-11)
Crop Loans /
Agricultural NDDP
(2007-08)
1 2 3 4
KCC Accts/
Rural Popn.
(2004-05)
0.082
(0.113)
0.144
(0.132)

Crop Loans /
Agri. NDDP
(2004-05)
0.935**
(0.369)
0.844**
(0.361)
Log Agr.
NDDP pw,
2004-05
0.017***
(0.005)
-0.039
(0.031)
Log
Foodgrain
Yield,
2005-06
0.008
(0.005)
-0.059**
(0.026)

Share of
Agri.in DDP,
2004-05
0.001
(0.016)
0.023
(0.014)
-0.111
(0.07)
-0.056
(0.092)
Credit/NDDP
2004-05
0.032
(0.039)
-0.016
(0.051)
0.316
(0.284)
-0.024
(0.222)
Central Bank
Of India
-0.008
(0.005)
-0.003
(0.004)
-0.035**
(0.015)
-0.026
(0.019)
State Bank of
India
-0.007
(0.004)
-0.008
(0.004)
-0.026
(0.027)
-0.039
(0.027)
Punjab
National
Bank
0.006*
(0.003)
0.007
(0.004)
0.033*
(0.019)
0.027
(0.019)
UCO Bank -0.002
(0.006)
-0.000
(0.007)
-0.006
(0.027)
-0.018
(0.03)
Constant -0.126***
(0.04)
-0.024
(0.032)
0.484***
(0.152)
0.465*
(0.243)
R-squared 0.469 0.41 0.701 0.658
Number of
Observations
38 37 37 38


50



T
a
b
l
e

1
3
:

B
i
h
a
r

D
i
s
t
r
i
c
t
s

C
o
r
r
e
l
a
t
i
o
n

B
e
t
w
e
e
n

S
e
l
e
c
t
e
d

V
a
r
i
a
b
l
e
s

(
2
0
0
5
-
0
6

t
o

2
0
0
9
-
1
0
)


F
o
o
d
g
r
a
i
n

Y
i
e
l
d

G
r
o
w
t
h


L
o
g

F
o
o
d
g
r
a
i
n

Y
i
e
l
d
,


K
C
C

A
c
c
t
s
/

R
u
r
a
l

P
o
p
n

(
2
0
0
5
/
6
0
9
/

C
r
o
p

L
o
a
n
s
/

A
d
v
a
n
c
e
s

(
2
0
0
5
/
6
0
9
/

L
o
g

o
f

R
a
i
n
f
a
l
l

(
2
0
0
5
/
6
-
0
9
/

L
o
g

o
f

R
a
i
n
f
a
l
l

S
q
u
a
r
e
d

(
2
0
0
5
/
6
0
9
/

S
h
a
r
e

o
f

A
g
r

i
n

N
D
D
P


C
D
-

R
a
t
i
o

(
2
0
0
5
/
6
-
0
9
/
1
0
)

F
o
o
d
g
r
a
i
n

Y
i
e
l
d

G
r
o
w
t
h

(
2
0
0
5
/
0
6
-

0
9
/
1
0
)

1


L
o
g

F
o
o
d
g
r
a
i
n

Y
i
e
l
d
,

2
0
0
5
-
6

-
0
.
7
1

1


K
C
C

A
c
c
t
s
/

R
u
r
a
l

P
o
p
n

(
2
0
0
5
/
6
-
0
9
/
1
0
)

-
0
.
2
4

0
.
2
7
1
6

1


C
r
o
p

L
o
a
n
s
/

A
d
v
a
n
c
e
s

(
2
0
0
5
/
6
-

0
9
/
1
0
)

0
.
0
5

-
0
.
0
6

0
.
3
5

1


L
o
g

o
f

R
a
i
n
f
a
l
l

(
2
0
0
5
/
6
-

0
9
/
1
0
)

-
0
.
0
8

-
0
.
1
2

-
0
.
0
6

-
0
.
3
7

1


L
o
g

o
f

R
a
i
n
f
a
l
l

S
q
u
a
r
e
d

(
2
0
0
5
/
6
-
0
9
/
1
0
)

-
0
.
0
8

-
0
.
1
2

-
0
.
0
5

-
0
.
3
6

0
.
9
9

1


S
h
a
r
e

o
f

A
g
r

i
n

N
D
D
P
,

2
0
0
5

0
.
1
7

-
0
.
2
0

-
0
.
1
7

0
.
1
7

0
.
2
8

0
.
2
8

1


C
D
-

R
a
t
i
o

(
2
0
0
5
/
6
-

0
9
/
1
0
)

-
0
.
1
4

0
.
0
3
1

0
.
1
4

-
0
.
1
4

0
.
5
0

0
.
5
1

0
.
5
1
5
6

1

51

Table 14: Effect of KCC Lending on Productivity Growth
Dependent Variable: Growth in Foodgrain Yield (2005-06 to 09-10)
1 2
Log Foodgrain
Yield, 2005-06
-0.168***
(0.02)
-0.17***
(0.02)
KCC Accts/
Rural Popn.
(2005-06 to 2009-10)
-0.298
(1.362)

Crop Loans/
Total Credit
(2005-06 to 2009-10)
-0.062
(0.094)
Log of Rainfall
(2005-06 to 2009-10)
9.755***
(3.128)
9.331***
(3.108)
Log of Rainfall Sq.
(2005-06 to 2009-10)
-0.707***
(0.223)
-0.677***
(0.221)
Share of Agri.in DDP,
2004-05
0.091
(0.093)
0.109
(0.093)
CD- Ratio
(2005-06 to 2009-10)
0.000
(0.001)
-0.000
(0.001)
Constant -32.41***
(10.99)
-30.883***
(10.936)
R-squared 0.605 0.607
Number of
observations
37 37