Rationing, Spillover and Interlinking in Credit Markets: The Case of Rural Punjab

A parallel market structure may exhibit extensive rationing in the regulated segment, and hence spillover of unsatisfied demand into the unregulated segment of the market. In the latter segment, the borrower can choose to bundle loan contracts with output marketing through the lender. Using data on Punjabi cultivators, econometric estimation of such a structure yields three principal findings: (i) most borrowers and non-borrowers alike were rationed in the regulated market; (ii) the demand for credit was fairly inelastic with respect to the interest rate; and (iii) a contractual provision that tied credit to output marketing made informal lenders willing to advance much bigger loans.