Horizontal and Vertical Linkages between Formal and Informal Credit Markets in Backward Agriculture: A Theoretical Analysis
Indian Journal of Social Development, Vol. 2, No. 1, June 2002
13 Pages Posted: 24 May 2002
The paper shows that the policy of forging a vertical linkage between the formal and informal credit markets is distinctly superior to the existing credit policy of horizontally substituting the informal sector by the formal one. An inflow of subsidized formal credit to the informal lenders not only ensures better terms of borrowing to the small borrowers but also leads to higher agricultural productivity vis-a-vis the horizontal linkage case. Even if the informal sector lenders are allowed to collude, the informal interest rate is still lower in the vertical linkage case.
Keywords: Formal credit, informal credit, horizontal linkage, vertical linkage, moneylender, collusion
JEL Classification: Q14, O17, D89
Suggested Citation: Suggested Citation