Friendship–kinship network and access to bank credit in India

We examine the relationship between friends and relatives (FR) network and Indian households’ access to formal (bank) credit. Using a nationally representative dataset and a Heckman sample selection model with instrumental variables, we find that households with an active FR network are less likely to apply for bank loans, but conditional on applying, they are more likely to be approved. These results support our hypotheses that informal borrowing may reduce immediate credit needs while simultaneously enhancing perceived creditworthiness. Further, the FR network is complementary to land ownership in influencing loan application. In particular, it alleviates risk rationing by encouraging applications from land-rich households. These findings indicate that the FR network does not crowd out formal credit; rather, it crowds in formal credit by mitigating borrowing constraints. This study contributes to the broader literature on the interaction between the formal credit market and non-market informal institutions.