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Essays on Credit Markets in Rural India


An understanding of household finance in rural communities is vital to poverty reduction strategies in the developing world. Informal moneylenders continue to occupy a large part of the financial landscape in many developing countries, and policy interventions often focus on reducing the need for informal debt. In this dissertation, I focus on rural India, and study the interaction between the formal and informal financial sectors, how credit and savings policies impact local rural labor markets, and how labor market policies impact local credit markets.

In the first chapter, I study the relationship between formal and informal credit markets. These two sectors might either compete with each other, or be embedded in a vertical relationship with informal lenders on-lending formal loans, or both. I test this by analyzing whether credit market responses to demand shocks vary across environments with high and low supplies of formal credit. Exploiting rainfall shocks as exogenous changes to household incomes, I find that increases in incomes raise household borrowing from informal sources primarily due to higher borrowing for purchases of durable goods. This increase in borrowing is accompanied by an increase in informal loan interest rates, pointing to a demand response. I then exploit plausibly exogenous variation in formal credit supply, and find that the demand responses previously observed are absent when there are contractions in formal credit, suggesting complementarities between formal and informal credit. I validate this through a qualitative survey of informal moneylenders, who indicate using loans from banks as lending capital. These results suggest that informal moneylenders play an intermediating role between borrowers and formal financial institutions, contributing to their persistence in the credit landscape.

In the second chapter, I turn to credit market policy interventions. 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 participation in more ‘suitable’ occupations.

In the third chapter, I explore the credit market impacts of changes in labor markets. In the rural Indian context, both informal loans and participating in casual wage labor allow households to cope with unanticipated income shocks. In 2006, the Government of India introduced the National Rural Employment Guarantee Scheme (NREGS), which guaranteed each rural household 100 days of paid manual wage labor each year — increasing opportunities for these households. I develop a theoretical model of household borrowing, and derive testable predictions of how such an improvement in labor market opportunities might impact a household’s demand for credit, and the interest rates at which informal loans are contracted. I then exploit the staggered nature of the roll-out of this program to test these predictions. I find that access to NREGS allowed households to increase consumption expenditures, but had no significant effects on their informal borrowing. Unsurprisingly, the program also did not impact interest rates or the number of lenders in the informal market. These results, however, reflect short-term effects, and it is likely that over the longer-term, credit market relationships will evolve with the quality of NREGS.

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