Paper short abstract:

This paper explores the theme of caste-based inequalities in the Indian credit sector using Blinder-Oaxaca decomposition to explain how much of these differences are due to the differences in the characteristics of individuals and how much is unexplained which could be an estimate of discrimination.

Paper long abstract:

Culture, tradition and overt discrimination play a significant role in the Indian credit sector. The caste system has dominated the societal landscape in India for centuries, and it is known to have a huge influence on the economic, social and political spheres of Indian people. This paper examines whether caste-based differences explain the amount of credit sanctioned to the borrowers in India. We use Blinder-Oaxaca decomposition to analyse the loan differential between castes to show how much of this difference can be explained by the differences in the returns to personal characteristics and how much remains unexplained which could be attributed to discrimination. Additionally, we investigate if these loan differentials have changed over the years using data from the India Human Development Survey collected in 2005 and 2011-12. The loan amount equations are corrected for selection and simultaneity bias using the Heckman and an instrumental variable procedure. The decomposition analysis reveals that the credit differentials between general castes and other lower castes (except Other Backward Classes) have increased over the time period considered and a major portion of these differences are unexplained. Since quantitative analysis cannot always reveal the perceptions of the people involved in discriminatory behaviour, the results of this research have been complemented by qualitative data gathered from interviewing lower caste borrowers in North India to understand the nature of discrimination and obstacles faced by them in the credit sector.