Coexistence of Formal and Informal Credit Markets in India -A Study of Entrepreneurial Choices for House-based Industries

Abstract

The exploitation of informal money lenders and huge debt burden on the rural labour force
can’t be ignored across India till now. The study assesses the underlying causes of existence
of informal credit along with available subsidized formal credit in rural areas in India. It
builds up a simple theoretical approach based on specific assumptions on entrepreneurial
choice intended for sources of credit as investment to their house-based industries and thus
evaluates the theoretical frame-work to a self-surveyed data set. It is empirically tested that
the decision of the entrepreneurs is formed, basically, by the interaction between the cost of
access to formal credit and the relative efficiency of formal and informal lending mechanisms.
Institutional credit can’t be effectively served until and unless a proper interlinked credit
policy coupled with default management strategies, flexible terms and conditions along with
wide branch networks sets up.