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Interest rate formation in informal credit markets in India: does level of development matter?

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  • Manojit Bhattacharjee
  • Meenakshi Rajeev

Abstract

Access by the poor to financial resources on favourable terms and conditions is a necessary prerequisite for achieving any developmental goal for an economy. However, in India, about 50 percent of the population are financially excluded from the formal banking network. These households avail loans from informal lenders, who generally impose unfavourable terms and conditions on the borrower. This paper, based on an in-depth analysis of National Sample Survey Organisation (59th round, All India Debt and Investment Survey, 2003) unit record data, seeks to understand the factors that influence the formation of interest rates in the developed region vis-àvis the less developed ones, as the latter are seen to experience higher rates of interest. Using an ordered logit model, our analysis shows how in the developed regions the lack of monopoly power of lenders brings down interest rate levels.

Suggested Citation

  • Manojit Bhattacharjee & Meenakshi Rajeev, 2010. "Interest rate formation in informal credit markets in India: does level of development matter?," Brooks World Poverty Institute Working Paper Series 12610, BWPI, The University of Manchester.
  • Handle: RePEc:bwp:bwppap:12610
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    File URL: http://hummedia.manchester.ac.uk/institutes/gdi/publications/workingpapers/bwpi/bwpi-wp-12610.pdf
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    Cited by:

    1. Rajeev, Meenakshi & Vani, B P & Bhattacharjee, Manojit, 2012. "Nature and Dimensions of Farmers’ Indebtedness in India," MPRA Paper 42358, University Library of Munich, Germany.
    2. Rajeev, Meenakshi & Vani, B.P., 2014. "Uncertainty, risk and risk mitigation: Field experiences from farm sector in Karnataka," Working Papers 320, Institute for Social and Economic Change, Bangalore.
    3. Meenakshi Rajeev, 2015. "Is Access to Loan Adequate for Financing Capital Expenditure? A Household-level Analysis on Some Selected States of India," Working Papers id:7880, eSocialSciences.
    4. Driouchi, Ahmed & Mertou, Amat, 2012. "High Implicit Interest Rates in the Context of Informal Traditional Housing Transactions: Evidence from Morocco," MPRA Paper 38732, University Library of Munich, Germany.
    5. Ghosh, Saibal & Kumar, Rakesh, 2014. "Monetary policy and informal finance: Is there a pecking order?," MPRA Paper 65243, University Library of Munich, Germany.
    6. Sinduja Srinivasan, 2014. "Impact of Public Works on Household Occupational Choice Evidence from NREGS in India," Working Papers WR-1053, RAND Corporation.
    7. repec:pal:eurjdr:v:29:y:2017:i:2:d:10.1057_s41287-016-0014-y is not listed on IDEAS
    8. Bhattacharjee, Manojit & Rajeev, Meenakshi, 2014. "Is access to loan adequate for financing capital expenditure?: A household level analysis on some selected states of India," Working Papers 315, Institute for Social and Economic Change, Bangalore.

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