The determinants of moneylender interest rates: Evidence from rural India

Abstract

This study examines the determinants of moneylender interest rates in rural India in the context of two major developments of the 1960s: (a) the incidence of agricultural technical change in the process popularly denoted by the term ‘Green Revolution’ and (b) the spread of government‐sponsored subsidised credit through rural banks and co‐operative credit agencies. It finds that farmers residing in areas characterised by the use of Green Revolution technology face lower moneylender interest rates. It also finds evidence of the reduction of moneylender monopoly power as a result of increased competition from formal lending agencies. It concludes that informal rural credit markets are sensitive mechanisms which respond to environmental as well as borrower characteristics.