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Bank-moneylender linkage as an alternative to bank competition in rural credit markets

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  • Adel Varghese

Abstract

This paper proposes a new method in which banks and moneylenders can link in rural credit markets. Banks and moneylenders, two of the major lenders in rural credit markets, differ in their information on borrowers and costs of funds. Due to information constraints, banks must deny further loans to borrowers who cannot repay a certain amount. In the linkage, these borrowers obtain loans from moneylenders, repay the banks, and have continuing access. We then evaluate conditions under which the linkage would be preferred to bank competition and find that the linkage dominates for a wide range of parameters. In light of recent proposals to liberalize Indian banking, the analysis provides a cautionary note to the limits of introducing banking competition in rural credit markets and provides an alternative. Copyright 2005, Oxford University Press.

Suggested Citation

  • Adel Varghese, 2005. "Bank-moneylender linkage as an alternative to bank competition in rural credit markets," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 315-335, April.
    • Handle: RePEc:oup:oxecpp:v:57:y:2005:i:2:p:315-335
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    File URL: http://hdl.handle.net/10.1093/oep/gpi014
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    Cited by:

    1. Pushkar Maitra & Sandip Mitra & Dilip Mookherjee & Sujata Visaria, 2020. "Decentralized Targeting of Agricultural Credit Programs: Private versus Political Intermediaries," HKUST IEMS Working Paper Series 2020-70, HKUST Institute for Emerging Market Studies, revised Jan 2020.
    2. Madestam, Andreas, 2014. "Informal finance: A theory of moneylenders," Journal of Development Economics, Elsevier, vol. 107(C), pages 157-174.
    3. Campero Alejandra & Kaiser Karen, 2013. "Access to Credit: Awareness and Use of Formal and Informal Credit Institutions," Working Papers 2013-07, Banco de México.
    4. SODOKIN, Koffi, 2006. "Functional and structural complementarities of banks and microbanks in L.D.Cs," LEG - Document de travail - Economie 2006-10, LEG, Laboratoire d'Economie et de Gestion, CNRS, Université de Bourgogne.
    5. Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2010. "Formal versus Informal Finance: Evidence from China," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3048-3097, August.
    6. Cuong Viet Nguyen & Marrit Berg, 2014. "Informal Credit, Usury, or Support? A Case Study for Vietnam," The Developing Economies, Institute of Developing Economies, vol. 52(2), pages 154-178, June.
    7. Shirley J. Ho & Sushanta K. Mallick, 2017. "Does Institutional Linkage of Bank-MFI Foster Inclusive Financial Development Even in the Presence of MFI Frauds?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(3), pages 283-309, July.
    8. SODOKIN, Koffi, 2006. "La complémentarité des banques et des microbanques dans une approche de la comptabilité des flux et des stocks," LEG - Document de travail - Economie 2006-09, LEG, Laboratoire d'Economie et de Gestion, CNRS, Université de Bourgogne.
    9. Nguyen Viet, Cuong & Van den Berg, Marrit, 2011. "The impact of Informal Credit on Poverty and Inequality: The Case of Vietnam," MPRA Paper 54758, University Library of Munich, Germany.
    10. Kanika Rana & Brinda Viswanathan, 2019. "Patterns of Access to Microfinance Loans in India," Review of Development and Change, , vol. 24(2), pages 259-279, December.
    11. Arturo GARCÃ A-SANTILLÃ N, & Jesica RAMOS-HERNÃ NDEZ, & Sara HERNÃ NDEZ-GONZÃ LEZ, & Patricia RIVERA-SANTIAGO, 2017. "Pawnshops: Are They Really A Solution For The Vulnerable Population?," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 6(1), pages 1-52, January.

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