Social Proximity and Loan Terms: Evidence from Informal Credit Markets in Rural India

Arnaud Natal () and Damien Girollet
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Arnaud Natal: BSE - Bordeaux sciences économiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IFP - Institut Français de Pondichéry - MEAE - Ministère de l'Europe et des Affaires étrangères - CNRS - Centre National de la Recherche Scientifique
Damien Girollet: BSE - Bordeaux sciences économiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: How does social proximity between borrowers and lenders influence informal lending terms in rural areas of the Global South? We answer this question using a unique dataset collected in 2020-2021 in rural South India. We examine four dimensions of loan agreements: interest rates, collateral, services provided by lenders, and by borrowers. We analyse the role social proximity (i.e., homophily and strength of ties) in determining credit terms using loan-level probit models. We find two key results. Firstly, social proximity operates as an ambivalent resource: while homophily and strong ties reduce the financial cost of borrowing, they are also associated with reciprocal obligations. Secondly, the benefits of social proximity are unequally distributed across social groups. These findings suggest that informal credit markets are deeply embedded in local hierarchies and that policies addressing household indebtedness must go beyond financial inclusion to tackle the structural inequalities shaping credit relations.

Keywords: Interpersonal networks; Debt; Homophily; Strength of ties; Tamil Nadu (search for similar items in EconPapers)
Date: 2026
Note: View the original document on HAL open archive server: https://hal.science/hal-05701286v1
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