Segmentation, Collateral Undervaluation, and the Rate of Interest in Agrarian Credit Markets: Some Evidence from Two Villages in South India

Madhura Swaminathan

Cambridge Journal of Economics, 1991, vol. 15, issue 2, 161-78

Abstract: This paper examines certain issues pertaining to the structure of agrarian credit markets in developing countries using empirical evidence on credit transactions from two villages in south India. First, the bases for the segmentation between formal and informal sectors of the credit market are identified as being: (1) the type of collateral offered on credit contracts, and (2) the purpose for which credit is taken. Secondly, the paper shows the occurrence of a systematic association between rates of interest and types of collateral. The evidence supports the hypothesis that lower marketability of collateral security, and hence higher undervaluation, increases the rate of interest charged on a loan. Thirdly, the evidence shows an inverse relationship between the value of land owned by a borrower and the rate of interest on a credit contract. Copyright 1991 by Oxford University Press.

Date: 1991
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