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The Impact of Microfinance Institutions on the Informal Credit Market: Evidence from Andhra Pradesh

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  • Tiziana Venittelli

    (University of Naples Parthenope)

Abstract

This paper explores the reaction of informal lenders to the expansion of microfinance institutions (MFIs) in the rural credit market of Andhra Pradesh. Using an IV strategy to deal with endogeneity concerns, we document that an increase in MFI loans significantly raises the informal interest rate. Yet, we show that the effect of MFI expansion on the informal interest rate differs across villages according to the level of competition in the informal credit market, as measured by the landless share in the village. In particular, we find that the impact of microcredit supply is positive and significant in villages with low level of competition, but not significant in villages with high level of competition. We argue that in less competitive villages, increasing MFI loans generate detrimental consequences for the poorest, by worsening their informal credit market access conditions, while in more competitive villages, MFIs cannot subtract clients from moneylenders.

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  • Tiziana Venittelli, 2017. "The Impact of Microfinance Institutions on the Informal Credit Market: Evidence from Andhra Pradesh," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 29(2), pages 512-531, April.
    • Handle: RePEc:pal:eurjdr:v:29:y:2017:i:2:d:10.1057_s41287-016-0014-y
    DOI: 10.1057/s41287-016-0014-y
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    2. Shika Saravanabhavan & Meenakshi Rajeev, 2024. "Financial inclusion in India: How far do grassroots institutions matter?," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(5), pages 2318-2341, July.

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