Cultural Proximity and Loan Outcomes∗

We present evidence that cultural proximity (shared codes, beliefs, ethnicity) between lenders and borrowers increases the quantity of credit and reduces default. We identify in-group lending using dyadic data on religion and caste for officers and borrowers from an Indian bank, and a rotation policy that induces exogenous matching between them. Having an in-group officer increases credit access and loan size dispersion, reduces collateral requirements, and induces better repayment even after the in-group officer leaves. We consider a range of explanations and suggest that the findings are most easily explained by cultural proximity serving to mitigate information frictions in lending. ∗Thanks to Andres Lieberman and Sravya Mamadiana for outstanding research assistance. We would also like to thank the editor and three anonymous referees for detailed feedback. Additionally, we are grateful to Andres Almazan, Abhijit Banerjee, Oriana Bandiera, Shawn Cole, Esther Duflo, Michael Kremer, Raghu Rajan, Antoinette Schoar, Paola Sapienza, Luigi Zingales, and the participants at the CEPR/AMID Development Economics Symposium, CFS-EIEF Conference on Household Finance, Columbia University, Boston University, European Bank for Reconstruction and Development, London Business School, London School of Economics, MIT-Sloan, the NBER conferences in corporate finance and household finance, Stockholm School of Economics, Vienna University of Economics and Business, and Yale SOM for comments. †Columbia Business School, NBER, BREAD; e-mail: [email protected] ‡London School of Economics, NBER, BREAD; e-mail: [email protected] §London Business School, CEPR; e-mail: [email protected]