The Moneylender as Middleman: Formal Credit Supply and Informal Loans in Rural India
(JOB MARKET PAPER)
Informal moneylending continues to flourish across the developing world, despite expansions in the formal financial sector. In this paper, I investigate whether the two sectors compete, or are embedded in a vertical relationship in the context of non-agricultural lending. I find that weather-induced increases in incomes raise household borrowing from informal sources primarily due to higher borrowing for purchases of durable goods. This is accompanied by an increase in informal loan interest rates, suggesting a demand response. However, the increase in transacted loans is significantly lower when districts experience a contraction in the supply of formal credit. To explain this, I turn to primary and secondary survey data, which indicate that moneylenders use formal loans as lending capital, increasing such borrowing when met with shortfalls. Together, these results suggest that informal moneylenders play an intermediating role between borrowers and formal financial institutions, contributing to their persistence in the consumption credit landscape.
Relief from Usury: Impact of a Community-Based Microcredit Program in Rural India
(with Vivian Hoffmann, Vijayendra Rao and Upamanyu Datta)
Accepted at Journal of Development Economics
Earlier draft: World Bank Policy Research Working Paper No. WPS 8021, 2017.
Provision of low-cost credit to the poor through self-help groups (SHGs) has been embraced as a key poverty-reduction strategy in developing countries, but evidence on the impact of this approach is thin. Using a randomized program rollout over 180 panchayats, we evaluate the impact of a government-led SHG initiative in the Indian state of Bihar. Two years after the start of the program, we find a dramatic increase in SHG membership, borrowing from SHGs, and a corresponding decline in the use of informal credit. Fewer informal lenders are operating in treatment villages, and those who do charge lower interest rates. While these credit market impacts could lead to substantial improvements in economic well-being over time, the short-run impact of the program on such outcomes is modest.
Access to Finance, Empowerment and Women's Employment: Experimental Evidence from Rural Bihar
Federal and state governments in India have relied on women’s Self-Help Groups (SHGs) to provide access to low-cost credit and savings with the dual intent of financial inclusion and women’s empowerment. I focus on one such SHG initiative in the state of Bihar, Jeevika, and exploit the randomized roll-out of the program to evaluate its impact on women’s labor supply. I find that the program had mixed effects across caste categories. Women from more privileged households increased their labor supply, while both women and men from disadvantaged households decreased their labor supply. The decline in labor supply among disadvantaged households is driven by reduced participation in agricultural wage labor, and is associated with an increase in agricultural labor wage rates. These results suggest that better access to finance reduces the need to sell labor as a coping mechanism for women from more vulnerable households; while allowing women from privileged households to increase their labor force participation in more ‘suitable’ occupations.