© 1990 International Bank for Reconstruction and Development / The World Bank
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Interactions between Institutional and Informal Credit Agencies in Rural India
The author is a professor of economics at Vanderbilt University. This article was originally prepared for a World Bank Conference on Agricultural Development Policies and the Theory of Rural Organization, Annapolis, Maryland, June 14–16, 1989. This revised version has benefited from the valuable comments of Kaushik Basu, Karla Hoff, and three anonymous referees.
In an attempt to expand rural credit and displace the village moneylender, India created a system of rural cooperatives in the 1950s and expanded branch banking into rural areas in the 1970s. This article examines how these measures affected the rural market. It begins with the question of how large the expansion of institutional credit has been and the extent to which it has dislodged the village and nonresident moneylenders. A detailed comparison of three major surveys of the Indian rural credit market suggests that in various guises, the moneylender is still a major source of loans. The article also examines the (weak) evidence on intermediation between the formal and informal sectors. A formal model of the interaction between the informal moneylender and institutional lender is constructed under a variety of assumptions about the exclusivity of loan contracts and the competitive structure of the informal sector. The conclusions are drawn together in the form of five proposals for public policy.
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