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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?," Global Development Institute Working Paper Series 12610, GDI, The University of Manchester.
    • Handle: RePEc:bwp:bwppap:12610
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    Cited by:

    1. 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.
    2. Ghosh, Saibal & Kumar, Rakesh, 2014. "Monetary policy and informal finance: Is there a pecking order?," MPRA Paper 65243, University Library of Munich, Germany.
    3. Meenakshi Rajeev & Christoph Scherrer, 2021. "Smallholders’ Challenges: Realizing Peri-Urban Opportunities in Bengaluru," Sustainability, MDPI, vol. 13(18), pages 1-18, September.
    4. Rajeev, Meenakshi & Vani, B P & Bhattacharjee, Manojit, 2012. "Nature and Dimensions of Farmers’ Indebtedness in India," MPRA Paper 42358, University Library of Munich, Germany.
    5. 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.
    6. Manojit Bhattacharjee & Meenakshi Rajeev, 2014. "Accessibility to Credit and its Determinants: A State-level Analysis of Cultivator Households in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 8(3), pages 285-300, August.
    7. Cariappa, A. G. Adeeth & Sendhil, R, 2021. "Does Institutional Credit Induce on-Farm Investments? Evidence from India," 2021 Conference, August 17-31, 2021, Virtual 315221, International Association of Agricultural Economists.
    8. Sinduja Srinivasan, 2014. "Impact of Public Works on Household Occupational Choice Evidence from NREGS in India," Working Papers WR-1053, RAND Corporation.
    9. Meenakshi Rajeev & Manojit Bhattacharjee & B P Vani, 2015. "Crop Insurance and Risk Mitigation: Experiences from India," ICDD Working Papers 15, University of Kassel, Fachbereich Gesellschaftswissenschaften (Social Sciences), Internatioanl Center for Development and Decent Work (ICDD).
    10. Rajeev, Meenakshi., 2015. "Financial inclusion and disparity : a case of India," ILO Working Papers 994883243402676, International Labour Organization.
    11. Manojit Bhattacharjee & Meenakshi Rajeev, 2013. "Credit Exclusion of the Poor: A Study of Cultivator Households in India," ICDD Working Papers 8, University of Kassel, Fachbereich Gesellschaftswissenschaften (Social Sciences), Internatioanl Center for Development and Decent Work (ICDD).
    12. Khondker Aktaruzzaman & Omar Farooq, 2020. "Cultural fractionalization and informal finance: evidence from Indian firms," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 661-679, December.
    13. Shrabani Mukherjee, 2015. "Entrepreneurial Choice of Investment Capital for House-based Industries," Review of Market Integration, India Development Foundation, vol. 7(3), pages 214-241, December.
    14. Aswini Kumar Mishra & Vedant Bhardwaj, 2022. "The Determinants of Access to Informal Credits in India: An Application of Quantiles via Moments Method," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(1), pages 1-22, March.
    15. Faisal Buyinza & John Mutenyo & Anthony Tibaingana, 2018. "Factors Affecting Access to Formal Credit by Micro and Small Enterprises in Uganda," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 4(4), pages 405-424, October.
    16. repec:ilo:ilowps:488324 is not listed on IDEAS
    17. 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.
    18. Wichyada Tanomchat & San Sampattavanija, 2018. "Dependence of Informal Interest Rates and Level of Lenders’ Influence in the Informal Loan Market in Thailand," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 24(1), pages 47-63, February.
    19. Tiziana Venittelli, 2017. "The Impact of Microfinance Institutions on the Informal Credit Market: Evidence from Andhra Pradesh," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 29(2), pages 512-531, April.
    20. Moumita Basu & Ranjanendra Narayan Nag, 2018. "Dualism, exchange rate, and employment: a structuralist model," Indian Economic Review, Springer, vol. 53(1), pages 287-310, December.

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