| Abstract: |
Microfinance bridges the credit gaps that formal financial institutions, like
banks, are unable to meet for the rural populations. Micro Finance
Institutions (MFIs) like Grameen Bank in Bangladesh, Bank Rakyat Indonesia and
BancoSol in Bolivia have brought small credit, savings and other financial
services within the reach of millions of financially excluded poor and
uneducated.This paper explores the workings of this credit market and the
underlying strategies in borrowing and repayment in India through a primary
field survey of 829 rural borrowers in four districts of the Indian states of
Andhra Pradesh and Telangana. The paper seeks to answer the following four
questions, namely, Do rural borrowers plan their borrowings? Does the purpose
of credit decide the source of credit? Is there a demand and supply elasticity
in credit market? Would mortgage borrowing behave differently?Results, using
regression models, show a link between borrowing behavior and the purpose of
credit.•Source of credit does depend upon the purpose of borrowing.
Agriculture and business investment loans are more likely to be sourced from
formal sources, and education and health loans, from informal sources. Loans
for agriculture might be sourced from banks only in part, or may not be
supplied in time for cropping season, forcing borrowers to approach money
lenders•The demand elasticity is minimal. Interest rates do not seem to impact
borrowing, except for mortgage borrowing. More so for lifecycle needs like
health and consumption, where all classes of borrowers borrow.•Mortgage
borrowers drop their investment plans during time-lag between application and
approval of loans, pointing to supply-side constraints•Small and marginal
land-holders borrowing for mortgage, are likely to pay higher interest rate
for money-lenders’ loans. This shows that lenders follow a price rationing of
credit to low collateral borrowers. That farmers and business investors
default on money-lenders’ loans shows that the latter, may have financed their
investment in part. This shows that they do not get as much loan as applied
for, from banks, pointing to size-rationing of credit.The results show a clear
debt-trap where borrowers could be borrowing from one source to repay another,
or may be resorting to multiple borrowings for the same purpose, as predicted
by Jain and Mansuri (2008), who observe that moneylenders finance loan
installments. |