Determinants of Bank Default in Rural Areas:A Case Study of Bankura District

Objectives: This study attempts to investigate the determinants of bank default in repayment of loan in the district of Bankura (West Bengal). It also looks in to the presence of wilful defaulter.

Methods/Statistical analysis: We have collected the primary data during 2009-2010 from 400 sample borrowers who have taken loans from Commercial Banks, Regional Rural Banks and Co-operative banks. Here the dependent variable is probability of bank default. We employed the logit models to identify the main determinants that influence the bank default of the borrowers.

Findings: In the logit model, we find that the ability to repay loans and the probability of bank default are negatively related for households in below poverty line and middle income group. But it is positively related to the probability of bank default for households in high income group. It may be due to wilful default for customer. We also find that the probability of bank default varies directly with the level of income. This is an also indication of wilful default for rich people. Ultimately this study shows that there are two types of defaulters, namely, wilful defaulters and involuntary defaulters. The reason for the wilful default includes membership of the governing body of the loan sanctioning authority. The reasons for the involuntary default include education level of the borrowers, short fall of desired level of investment, higher dependency ratio of the family, lack of proper irrigated, unproductive use of loans and inability of the borrowers to repay the loans to the banks due little income generation.

Applications: This study needs coordination between the financial institutions and borrowers to increase the growth rate of income of the borrowers. It has also suggested the government to reduce the probability of bank default.