Cultural Proximity and Loan Outcomes

Abstract

We present evidence that shared codes, beliefs, ethnicity --cultural proximity-- be- tween lenders and borrowers improves the efficiency of credit allocation. We identify in-group preferential treatment using dyadic data on the religion and caste of officers and borrowers from a bank in India, and a rotation policy that induces exogenous matching between officers and borrowers. Having an in-group officer increases access to credit and loan size dispersion, reduces collateral requirements, and induces better repayment even after the in-group officer leaves. These effects diminish with group heterogeneity and size. The results imply that cultural proximity mitigates informational frictions in lending.