Classification of Credit rationing and its Application in Agricultural - A review
Online veröffentlicht: 26. März 2025
Eingereicht: 16. Nov. 2024
Akzeptiert: 18. Feb. 2025
DOI: https://doi.org/10.2478/amns-2025-0827
Schlüsselwörter
© 2025 Bin Wang et al., published by Sciendo
This work is licensed under the Creative Commons Attribution 4.0 International License.
It is generally believed that credit rationing is a state in which loan demand exceeds loan supply when loan interest rates are below the Walras Market Clearing level [1]. The issue of credit rationing has been widely studied by scholars since its theoretical inception. This is mainly because one of the main drivers of modern economic development, ″investment″, relies on indirect financing (i.e., credit) as its main source. Credit rationing can be a serious constraint on the economics of a country or region, and among industries in a country, the agricultural faces disadvantages such as high natural risks, imperfect market information, and lack of effective collateral [2], which makes credit rationing in agricultural even more serious.
In China, credit rationing is even more serious in agricultural because the historical legacy of binary patterns and the imperfect financial system and rural financial ecological environment. Since 2004, the Chinese government has continuously proposed measures to address rural financial issues. Despite the government′s continuous efforts to promote financial system reform and increase financial policy support in agricultural, the situation of financial institutions being reluctant or unwilling to lend still exists. Correspondingly, the credit demand of farmers remains strong. Therefore, it is necessary to conduct in-depth research on the issue of credit rationing in agricultural.
However, due to differences in understanding the definition and types of credit rationing, scholars have different research scopes in different periods. Even contradictions may arise between the two, seriously affecting the logic and accuracy of subsequent research. Therefore, this article summarizes the definition and classification of credit rationing based on classic literatures and the latest research progress. On this basis, further review the research literatures on credit rationing in agricultural, point out the shortcomings of existing research, and provide direction guidance for future research on agricultural credit rationing. It also has important theoretical and practical significance for enriching the theory of credit rationing, scientifically understanding the connotation of credit rationing, and formulating policies to alleviate agricultural credit rationing.
From a historical perspective, research on issues related to credit rationing can be traced back to as early as the eighteenth century, and the formation of its theory has gone through three stages: the nascent stage, the development stage and the mature stage.
Early studies did not have the concept of rationing, but only analyzed the economic phenomenon of mismatch between supply and demand in the borrowing market. Smith (1776) argued that different lending entities may have varying demands for loan based on their own needs and future expectations under different interest rate in ″An Inquiry into the Nature and Causes of the Wealth of Nations″ [3]. Keynes (2024) further analyzed the phenomenon of credit demand and supply imbalance in his book ″Treatise on Money: Pure Theory of Money″ [4]. He denied the assumption that the credit market could clear immediately, which means there is an imbalance between credit supply and demand. But early scholars believed that this imbalance phenomenon was only occasional or short-term, and ultimately the market would return to equilibrium.
It was not until the 1950s that the establishment of the Credit Availability Doctrine began to draw scholarly attention to issues related to credit rationing[5-6]. Most of the studies at that time focused on macroeconomic, such as the impact of credit rationing on the economy during the transmission of monetary policy. Since then, scholars began to explore the deeper reasons for the emergence of credit rationing, and related research entered a developmental stage.
The progress in the macro area has triggered scholars to explore the micro area. Scholars began to study the causes of credit rationing in the micro area, starting from banks′ judgments of loan risk and bank-firm relationships [7-9]. However, the maturity of credit rationing theory was marked by scholars who introduced incomplete information theory into credit markets, defined the concept of credit rationing using interest rates as a screening tool, and constructed research framework of credit rationing from collateral, incentives, moral hazard, and adverse selection [9-11]. Subsequently, credit rationing theory has been further refined and gradually expanded to practical applications in various fields[12-14].
The preceding section provides a brief review of the development of credit rationing theory, but it does not clarify what credit rationing is. This is mainly because scholars have different understandings of what credit rationing is and its definition varies at different times. Therefore, the studies in different periods are subject to the differences in the perception of credit rationing and the content of the studies are also somewhat different. With the in-depth research on credit rationing, the definition and type of credit rationing have been closely linked, and even the definition of different types of credit rationing has become a key element in distinguishing different definitions of credit rationing. Therefore, instead of discussing the definitions and types of credit rationing separately, this paper synthesizes them together.
Jaffee and Modigliani (1969) define equilibrium and disequilibrium credit rationing in terms of whether the lending rate is in equilibrium or not [9]. He argues that the rationing that occurs when the lending rate is at a long-run equilibrium level is called equilibrium credit rationing; in the short run, the short-run economic phenomenon that occurs when the real lending rate is not adequately adjusted to the long-run optimal equilibrium rate is called disequilibrium credit rationing. This equilibrium credit rationing may be due to ″the inability of the credit market to clear under general interest rate conditions and other conditions attached to the profit maximization motive of banks″ , while the disequilibrium credit rationing is due to financial regulation of interest rates [15].
Price rationing can also be referred to as interest rate rationing. Early on, Hodgman (1960) distinguished between the concepts of traditional rationing and credit rationing [7]. Traditional rationing is the willingness of a borrower to pay a higher interest rate to compensate for the risk taken by the lender, but the borrower may take on too high an interest rate. Hodgman considered credit rationing to be related to the behavior of the lender, who assesses the borrower′s credit quality and willingness. And then the lender determined borrower′s the maximum repayment amount (principal and interest). The credit rationing occurs when the lender believes that the interest charged based on the borrower′s credit needs cannot compensate for the risk of default.
Friedman (1990) defines interest rate rationing (price rationing) as a situation in which a borrower receives less than the amount he expects at a given interest rate and must pay a higher interest rate if he wants to receive more credit [1]. He also gives the definition of ″pure credit rationing″ and ″redlining″. Pure credit rationing is the idea that in some cases, some people will get a loan while others who are apparently willing to borrow on exactly the same terms will not [1]. Redlining is the state in which a lender will refuse to lend to a borrower under certain circumstances of risk when the lender is unable to obtain the required return at any interest rate.
J. Verteramo Chiu et al. (2014) provide a further breakdown of price rationing based on the original study [16]. He argues that price rationing can be divided into two types. One is for lenders to increase interest rates or transaction costs, and free choice along the credit demand curve can lead to utility maximization (borrowers are satisfied with the current price of loans, but still cannot obtain loans). This is ″external price rationing″. Another type is that borrowers voluntarily choose to exit the credit market when faced with fair market prices and transaction costs, which is known as ″internal price allocation″.Moreover, price rationing is determined by the cost-volume equilibrium on the demand curve, and the degree of rationing is influenced by the elasticity of demand for individual credit.
In addition, credit rationing has been considered in other literature as a situation when a corporate borrower has an excessive demand for credit and is unable to obtain the required amount of credit from the bank [17]. Bellier et al. (2012) clearly define credit rationing by designating unsatisfied borrowers who cannot borrow at the prevailing interest rate when faced with credit rationing [18]. Elwood (2010) describes credit rationing as a situation where there is an excessive demand for credit and borrowers want far more money at market rates than lenders offer [19]. Martin (1990), Elwood (2010), Bellier et al. (2012) argue that excessive demand for loans does not clear the market by raising interest rates [17-19].
Price rationing is a discussion of credit rationing in terms of changes in interest rates. Baltensperger (1974) describes this more precisely by referring to the rationing of loans by adjusting interest rates as narrow credit rationing [20] (i.e., price rationing, also known as ″interest rate rationing″). And generalized credit allocation (i.e. non price allocation) is that credit allocation caused by non-loan interest rates.
The most classic early understanding of non-price rationing was Keeton and Stiglitz′s exposition of ″two types of rationing″. Keeton (2017) provided a more formal definition of credit rationing and proposed two types of rationing [21]. Type I: Under a given loan interest rate, some or all loan applicants receive less loan than they expected. Type II: Some loan applicants are denied loans, even if the bank cannot distinguish them from applicants who have received loans.
Stiglitz and Weiss (1981) provide a more comprehensive explanation of credit rationing based on Keeton′s study, arguing that credit rationing should satisfy the conditions that (a) among seemingly identical loan applicants, some receive loans while others do not, and that rejected applicants do not receive loans even if they are willing to offer higher interest rates; (b) for a given credit supply conditions, for some identifiable individuals who are unable to obtain a loan at any interest rate, they would still be unable to obtain a loan even if the supply of credit were increased [10].
Similarly, Brown (2008) describes credit rationing as a situation in which banks do not use interest rates to allocate funds [22]. This means that credit rationing occurs when banks refuse to lend to certain borrowers or restrict the size of loans they lend, regardless of whether the borrower is willing to pay a higher interest rate.
The early studies of non-price rationing mentioned above, while not explicitly defining non-price rationing, all found that it was not just the interest rate that affected credit rationing, but other factors as well. As the research progressed, scholars refined the classification of non-price credit rationing. For the current study, non-price rationing consists of three main categories. first, borrowers who wish to borrow funds at current interest rates but do not qualify for a loan (or cannot fully meet their loan needs), second, borrowers who do not want to pay transaction costs for the loan, and third, borrowers who fear losing collateral [23]. The above three categories can be grouped into volume rationing, cost rationing and risk rationing.
Gonzalez-Vega (2021) introduces the concept of credit rationing with both non-price terms and price terms, arguing that, subject to a certain interest rate, lenders allocate credit resources based on non-price factors, resulting in an actual quantity lent that is less than their lending capacity, which is called volume rationing [24]. Boucher (2009) argue that volume rationing occurs when a borrower faces a profitable project whose nominal demand for credit is positive but faces zero supply of credit, this occurs when volume rationing occurs [25]. Kremp (2013) and Adair (2014) categorize and summarize the previous studies and classify credit rationing into ″Credit Volume Rationing″ and ″Rationing of Borrower″ [26-27]. Credit Volume Rationing refers to the situation where a lender provides less credit than the borrower needs (or where only a small fraction of the loans requested by the borrower are rejected, i.e., Partial Volume Rationing). Rationing of borrower refers to the situation where a credit applicant is completely rejected (i.e., Full Volume Rationing).
Jappelli (1990) and Mushinski (1999) argue that transaction costs are important in turning nominal credit demand into real credit demand. Particularly in developing countries, lenders pass on to borrowers the costs they use to screen and monitor borrowers before signing a contract [28-29]. When a borrower is faced with a profitable project with a positive nominal demand for credit and a positive supply of credit in the market, the borrower will abandon the loan application because of the large cost and its effective demand is zero. For example, the proximity (or time) to the local bank, the ease of application documents, and the opportunity cost of entering into this contract, which is known as transaction cost rationing (or cost rationing) [25].
Binswanger and Sillers (1983) argue that farmers may exit the credit market if they are exposed to risky contracts without guarantees, even if they are able to obtain the desired credit. An increase in contractual risk and interest rates has a similar effect, i.e., it equilibrates the credit market by reducing demand. However, the excess demand for credit makes the credit market rarely in equilibrium [30]. Assuming that transaction costs are negligible, lenders generally contract borrowers to bear a large portion of the risk (e.g., mortgages) for reasons of moral hazard mitigation. Thus, even if obtaining a loan increases expected consumption, the borrower′s expected utility may be lower than their utility when they did not receive the loan. At this point, the borrower may abandon the loan application due to the excessive risk contained in the loan contract, which is known as risk rationing.
Since credit rationing and credit constraint are used interchangeably in much of the literature [31], it is necessary to sort out the two concepts. In fact, the concepts of Credit rationing and Credit constraint are not the same. First, they are studied from different perspectives. Although they both study lending imbalances, credit rationing is defined from the perspective of lenders, while credit constraint is defined from the perspective of borrowers. Second, there are differences in the scope of the two studies. Credit constraint is a situation where the borrower′s required funds cannot be met from the bank, but this credit gap is not always caused by credit rationing, but may be caused by credit discrimination or other factors. At the same time, credit rationing is not just a shortage of credit, but can also be an excess of credit.
Thus, the theoretical areas of study of credit rationing and credit constraints overlap considerably, but also differ somewhat. Therefore, when invoking the two concepts, attention should be paid to distinguishing the areas under study. For example, in the field of ″agriculture″, the concepts of credit rationing and credit constraint can be approximated for the credit problems of different agricultural operators, because most of the credit constraints they face come from the loan issuing institutions and there are few problems of credit excess. In other areas, credit rationing cannot be simply equated with credit constraints, but specific analysis should be conducted based on the characteristics of the research subject.
Through the above literature, we found that the definition of credit rationing has gone through a process of gradual refinement from coarse to fine, from broad to narrow. Early scholars′ research on credit rationing focused on the interest rate and used the basic principles of economics to elaborate the phenomenon of credit rationing from the perspectives of long and short term, internal and external utility maximization, etc. Some simple classifications and definitions have been formed, such as ″pure credit rationing″, ″red line″, ″internal price rationing ″, and ″external price rationing ″.
However, at this time, there was a lot of crossovers in the research, and the definitions or research contents were mostly mixed with some influencing factors other than interest rates. As subsequent scholars deepened their studies and refined their research fields, the definition of credit rationing was gradually improved, expanding from pure interest rate factors to costs, risks, endowments, etc., and its typology was also gradually clarified. However, there still exist unclear criteria for the division of types and crossover of research contents, leading to conflicting research findings.
To facilitate better follow-up research, this paper summarizes and extracts the core ideas of previous studies based on existing research, and summarizes the classification of credit rationing according to different criteria as follows.
First, credit rationing can be divided into equilibrium credit rationing and disequilibrium credit rationing according to whether the lending rate is in equilibrium or not.
Secondly, based on whether interest rate is considered, credit rationing resulting from interest rate can be referred to as price allocation. Credit rationing caused by factors other than interest rates is attributed to non-price rationing. Non-price rationing can be classified into volume rationing, cost rationing, risk rationing and discrimination rationing according to the above findings. However, from a causal perspective, cost rationing, risk rationing and discriminatory rationing are the ″cause″ and volume rationing is the ″effect″. Therefore, this paper adjusts the types of non-price rationing to cost rationing, risk rationing and discrimination rationing.
Thirdly, if we look at the supply and demand perspective, price rationing (interest rate rationing) and discrimination rationing are supply-side rationing and come mainly from the lenders, while cost rationing and risk rationing are demand-side rationing and come mainly from the borrowers themselves.
Finally, for volume rationing. Volume rationing is the result or manifestation of supply side rationing, so volume rationing should correspond to supply side rationing. The types, causes and manifestations of each rationing are shown in the table 1 below.
Types of credit rationing
| Type of rationing | Reason | Expressions | Type of rationing | |||
|---|---|---|---|---|---|---|
| Price rationing | Interest rate rationing | The borrower is unable to obtain the loan at the existing interest rate. | Volume rationing | Full | The borrowers were all denied their loan applications | Supply-side rationing |
| Non-price rationing | Discrimination rationing | Differences in individual characteristics (family endowment) | Partial | Borrower′s loan application partially denied | ||
| Cost rationing | Increased transaction costs and zero effective demand for loans | Borrower waives loan application | Demand-side rationing | |||
| Risk rationing | Increased contractual risk and lower expected utility for borrowers | Borrower waives loan application | ||||
Credit rationing in agricultural is richly researched, not only from the perspective of the corresponding credit rationing types, but also from the perspective of the influencing factors. The influencing factors can be divided into ″ Internal″ and ″ External ″. ″ Internal″ is that factors will affect credit rationing and the degree. The ″ External ″ is the impact of credit rationing on agriculture related fields.
Scholars have found through their investigations of rural credit markets that respondents have varying degrees of price rationing, volume rationing, cost rationing and risk rationing. In addition, there are further findings on cost, risk, and discrimination rationing.
In their study of rural credit markets in Poland, Petrick and Latruffe (2006) find that the borrowing costs incurred by different banks are also likely to differ. Therefore, transaction cost rationing can be significantly reduced if local banks provide high levels of financial services or maintain better relationships with banks.
Banks require borrowers to provide collateral or guarantees, for example, for credit security reasons, and among collateral banks especially prefer more liquid collateral. Empirical evidence shows that collateral security in rural markets can indeed effectively alleviate rural credit constraints by reducing information asymmetry between banks and farmers. Large farmers in some typical areas (e.g., areas where farmland mortgages are carried out) are significantly less subject to credit constraints than in areas where they are not [32]. And agricultural insurance can also be used as a collateral substitute to alleviate the credit rationing.
As mentioned earlier, discriminatory rationing is the limitation of loan amount made by banks due to the difference of individual characteristics of borrowers. Drawing on Petrick and Latruffe (2006), this paper introduces the concept of ″household endowment″ to elaborate individual differences, and sorts out studies related to discriminatory rationing from the perspectives of human capital endowment, economic capital endowment, social capital endowment, and geographical and environmental endowment.
In terms of human capital endowment. Age, capable person identity, working experience outside the home, personal credit, education, household size, etc. can have a significant impact on the credit constraints.
In terms of economic capital endowment. Income level, non-farm degree and the number of livestock raised all have significant negative effects on the credit constraints. Farmers with smaller cultivation size are more vulnerable to discrimination by lenders. Credit constraints can be alleviated as the scale of farmland cultivation increases, but credit constraints continue to adversely affect the economies of scale in agricultural production[33].
In terms of social capital endowment. The increase in ″weak ties″ in rural society, mainly friends, can alleviate farmers′ credit constraints. But it needs a certain ″maintenance cost″ and has a certain attribute of ″rich people″. Other attributes, such as membership in farmers′ organizations (cooperatives), can alleviate credit constraints.
In terms of geographic and environmental endowments. The geographical location in which farmers live can have an impact on the credit constraints. Conditions such as higher number of financial institutions or proximity to bank branches and better village infrastructure play an important role in alleviating the credit constraints.
In addition to the above studies, some scholars have explored the factors affecting credit rationing from other perspectives.
From the perspective of sources of financing channels, Wu et al. (2016), Cao and Yang (2020), Yin et al. (2017) divide credit into formal and informal credit. Formal credit supply subjects mainly include formal financial institutions such as state-owned banks, joint-stock commercial banks, urban commercial banks, rural commercial banks, village banks and rural credit societies. Informal credit providers include relatives and friends, underground money changers, etc. The empirical evidence shows that farmers have a strong demand for both formal and informal credit. This informal credit demand is influenced to some extent by social preferences, farmers′ financial literacy, education level, income structure and physical capital.
Turvey (2013) introduced the concept of ″policy rationing″, which refers to policy rationing in which the government or relevant agencies limit their influence on agricultural credit by taking policy action or by not taking action. This means that the government′s financial policies can directly influence the lending decisions of banks or credit unions in rural areas. From the perspective of China′s financial system change, the change of government-led rural financial system determines the change of agricultural credit rationing, and the efficiency of agricultural credit rationing in the early stage of rural financial reform is higher than that in the stage of deepening rural financial system reform, i.e., there is policy rationing in China′s rural sector [34].
Hu and Liu (2019) studied the relationship between the performance efficiency of credit contracts (law enforcement efficiency) and credit rationing. They find that the higher the credit contract performance efficiency, the lower the credit constraint.
Liu et al. (2014) explored the degree of credit rationing among farm households from the perspective of spatial variability. They argued that the spatial variability of the degree of credit rationing in China is very significant, and the main cause of this spatial variability lies in the randomness factors in the attributes of farm households, rural financial institutions and regional economies.
The factors affecting credit rationing were described earlier, so what is the impact of credit rationing in agriculture?
Impact on quality of life. Li (2014)argued that volume rationing reduces the consumption expenditure of farm households, which in turn has an impact on their quality of life. In testing the impact of different channels of credit constraints on farm households′ income, Cao and Yang (2020) find that formal credit constraints reduce the productive income of low-income farm households and reduce their quality of life.
Impact on the scale of cultivation. Zhang et al. (2017) found through a survey of retained farmers that credit constraints have a significant negative effect on the expansion of farming area and productive capital inputs of retained farmers in the main grain producing areas. Liu et al. (2020) also argue that credit constraints cause diseconomies of scale in agricultural production, but the impact takes a different form. They argue that credit constraints affect economies of scale not in terms of output levels but in terms of production costs, i.e., under credit constraints, there is no reduction in farmer scale output but an increase in production costs.
Impact on agricultural technology. Related studies show that credit constraints have a significant negative effect on the technical efficiency of farming and agro-pastoralism. This effect is mainly because credit constraints cause agricultural production inputs to deviate from input levels of output-maximizing, which in turn reduces the technical efficiency of production. This is also true for specific technology adoption, where credit constraints have a significant inhibitory effect on the adoption of environmentally friendly agricultural technologies [35]. By analyzing the impact of credit constraints on farmers′ production efficiency under different irrigation technologies, Jia and Lu (2017) found that the amount constraint had a greater impact on less productive farmers, while the interest rate constraint had a greater impact on more productive farmers.
By sorting out the research on credit rationing in agriculture from both ″internal″ and ″external″ perspectives, we can find that all types of credit rationing are manifested in agriculture, indicating that the problem of financial constraints in agriculture is still relatively serious. In terms of factors affecting credit rationing, scholars have found in the areas of differences in financing channels, policies, contract performance efficiency and spatial variation, expanding the extents of credit rationing research. Regarding the impact of credit rationing in agriculture, scholars have found that credit rationing adversely affects the development of scale and technology adoption, and to a certain extent reduces the effect of poverty reduction and farmers′ income generation and inhibits the improvement of farmers′ living standards. It is worth noting, however, that despite the richness of the two perspectives mentioned above, there are still certain shortcomings.
First, in terms of the factors affecting credit rationing, the empirical results for cost rationing and risk rationing are more consistent with the original theory, but there are some differences in the empirical results related to discrimination rationing.
Second, research on factors affecting credit rationing is more logical, mainly from the perspectives of cost rationing, risk rationing and discrimination rationing, while other areas are developed but relatively more focused. Research on the impact of credit rationing in agriculture has been more fragmented, less logical and causally interchangeable, as in the case of the relationship between planting size and credit rationing.
Factors affecting credit rationing
| Type of rationing | Affecting factors |
|---|---|
| Interest rate rationing | Information asymmetry, risk, etc. |
| Cost rationing | Proximity (or time) to local banks, ease of application materials, and opportunity cost of entering into this contract |
| Risk rationing | Mortgage guarantees, insurance, etc. |
| Discrimination rationing | Human endowment: age, capable person identity, experience of working outside the home, personal credit, education, number of family members, etc. |
| Economic endowment: income level, degree of non-farming, number of livestock breeding, scale of cultivation, etc. | |
| Social endowment: ″weak ties″ in rural society, membership in farmers′ organizations (cooperatives), etc. | |
| Geographical and environmental endowments: geographical location of residence, number of financial institutions, village-level infrastructure, etc. | |
| Other rations | Differences in access to finance |
| Policy changes | |
| Efficiency of contract performance | |
| Spatial variation |
In this paper, the definition and types of credit rationing and its application in agriculture are carefully sorted out. Scholars′ research on the types of credit rationing and its application in agriculture is very extensive, and the results are also outstanding. Scholars can consider the special situation of credit rationing in combination with different national conditions, which enriches the content of credit rationing research. But more in-depth research can be carried out in a certain field.
From the above research review, it can be found that scholars have a wide range of research and abundant research data. However, there is a lack of relevant issues from the perspective of economic principles and the revision of the existing classic models in combination with developing countries′ practice. When discussing the influencing factors of credit rationing, the regression equation is often used to verify the causal relationship, but the internal logical of this relationship is not clear, and the lack of rigorous theoretical derivation is prone to cause inversion, which will lead to the deviation of subsequent policy-making. In addition, scholars rarely explore credit rationing from the perspective of disequilibrium and dynamic model.
Agricultural development varies from country to country. The early elaboration of credit rationing theory is mostly based on the credit market of developed countries. When studying the problems of other countries, especially developing countries, its applicability will be different. For example, in some developing countries, interest rates are strictly regulated in the credit market. In practice, it is difficult to measure credit rationing through the level of interest rates. However, these problems can be indirectly elaborated by studying farmers′ preferences for different sources of financing. In addition, in some countries, in addition to market-oriented credit funds, there are also a large number of non-market funds (such as policy preferential loans, poverty alleviation funds, subsidies, etc.) doing a lot of basic work. These funds will reduce the production costs of farmers and curb their demand for commercial credit funds. An in-depth study of this difference is beneficial to expand the extension of credit rationing theory, enrich its connotation, and provide practical experience for the leapfrog development of agriculture in developing countries.
The research leading to these results received funding from [Modern Agricultural Industry Technology System Foundation of Hebei Province] under Grant Agreement No. [HBCT2024110301].
The authors declare no conflict of interest.