Informal Credit Markets in India

Growth Theory through the Lens of Development Economics

“…Timberg and Aiyar (1984), whose study is also mentioned above, report that average default losses for the informal lenders they studied ranges between 0.5% and 1.5% of working funds. The study by Aleem gives default rates for each individual lender.…”

“…A study by Timberg and Aiyar (1984) reports data on indigenous-style bankers in India, based on surveys they carried out: The rates for Shikarpuri financiers varied between 21% and 37% on loans to members of local Shikarpuri associations and between 21% and 120% on loans to non-members (25% of the loans were to non-members). Aleem (1990) reports data from a study of professional moneylenders that he carried out in a semi-urban setting in Pakistan in 1980-1981.…”

“…The "Summary Report on Informal Credit Markets in India" (Dasgupta (1989)) reports that several of the categories of lenders that have already been mentioned, such as handloom financiers and finance corporations, focus almost exclusively on financing trade and industry while Timberg and Aiyar (1984) report that for Shikarpuri bankers at least 75% of the money goes to finance trade and, to lesser extent, industry. In other words, they only lend to established firms.…”

“…The micro evidence reported in Banerjee (2003b), which shows that there is very substantial variation in the interest rate within the same sub-economy, certainly goes in this direction. The Timberg and Aiyar (1984) study mentioned above, is one source of this evidence: It reports that the Shikarpuri lenders charged rates that were as low as 21% and as high as 120%, and some established traders on the Calcutta and Bombay commodity markets could raise funds for as little as 9%. The study by Aleem (1990), also mentioned above, reports that the standard deviation of the interest rate was 38.14%.…”

“…One way to calibrate these numbers is to make use of the estimate from Banerjee and Duflo (2003a) that in India there are firms where the marginal product of capital seems to be close to 100%. On the other hand, some seem to have access to capital at 9% or so, and therefore may well have a marginal product reasonably close to 9% (Timberg and Aiyar (1984)). …”