Credit From Whom and For What Diversity

Journal of International Development
J. Int. Dev. 24, S122S137 (2012)

Published online 5 May 2011 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jid.1785
CREDIT FROM WHOM AND FOR WHAT?

THE DIVERSITY OF BORROWING
SOURCES AND USES IN RURAL
SOUTHERN INDIA
ISABELLE GURIN1,2*, MARC ROESCH3, GOVIDAN VENKATASUBRAMANIAN4
and BERT DESPALLIER5,6
1
UMR 201 Dveloppement et Socits, Institute of Research for Development, NogentsurMarne,
France
2
French Institute of Pondicherry, Pondicherry, India
3
CIRAD, Montpellier, France
4
French Institute of Pondicherry, Pondicherry, India
5
Hogeschool-Universiteit Brussel, Belgium
6
Lessius Hogeschool, Antwerpen, Belgium
Abstract: This article aimed to deepen understandings of poor household borrowing

practices by drawing on a case study from rural Southern India. It combines descriptive
statistics and qualitative analysis to show that households juggle with a wide range of
borrowing sources and that each serves very specic purposes. From a theoretical perspective,
we suggest that the neoclassical cost/benet framework often used to analyse debt decisions
should be enlarged to include social criteria in line with recent insights from economic
anthropology and political economy. From a policy perspective, we argue that all things being
equal, local nancial arrangements might have important comparative advantages over
traditional micronance products. Copyright 2011 John Wiley & Sons, Ltd.
Keywords: informal finance; microfinance; development studies; economic anthropology

JEL Classification: O17; O53; Z13
*Correspondence to: Isabelle Gurin, Research Unit Development and Societies (Paris I Sorbonne/IRD),
Institute of Research for Development, Campus du Jardin dAgronomie Tropicale de Paris, 45 bis Avenue de la
Belle Gabrielle, 94736 NogentsurMarne, France.
Email: isabelle.guerin@ird.fr
This paper draws on findings from the research programme Microfinance and Employment: Do Processes Matter?
funded by the French governmentfunded Agence Nationale de la Recherche (http://www.rumeruralmicrofinance.org).
Copyright 2011 John Wiley & Sons, Ltd.

The Diversity of Borrowing Sources and Uses S123
1 INTRODUCTION
Over the last 30 years or so, micronance has become a major development policy for
ghting poverty and nancial exclusion in poor countries. This is especially true in India
where the micronance market has developed considerably over the past decade, both in
scale and institutional diversity (Fisher and Sriram, 2002; Ghate, 2007; Srinivasan, 2009).
In 2009, it was estimated that around 86.2 million people have had access to micronance
services in India (SaDhan, 2009). Although micronance as a development tool is
supported by numerous actors, including policymakers, activists, philanthropists and
development scholars, it is also a controversial one.
The rst controversy concerns the quality of micronance services: to what extent does
micronance respond to the diversity and complexity of the demand for nancial services?
There is a growing consensus that micronance supply is too standardised, rigid and does
not adequately account for the diversity of nancial needs. There is an ongoing worldwide
mismatch between supply and demand (Meyer, 2002; Armendriz and Labie, 2011), and
India is certainly no exception to this (Ghate, 2007). A second and possibly more
fundamental controversy relates to the real development impact of micronance
(Fernando, 2005; Servet, 2006; Bateman, 2010). Recent impact studies have shown
mixed results, and globally, the impact of micronance on poverty and inequalities
reduction has been found to be inconclusive.2
We believe that the micronance sector would benet from a better understanding of
the nature of the demand for nancial services. In this respect, two fundamental questions
arise. Firstly, for what purposes do poor people borrow money? Is it to create businesses,
to educate their children, to buy consumer goods such as televisions or to nance their
daughters marriages? Irrespective of the question of its longterm impact on poverty (a
good marriage for a daughter might provide better nancial and social benets in the long
term than starting a business), improved awareness of borrowing purposes could help
explain the limited effects in the short term of micronance on poverty. A second question
relates to what borrowing sources the poor already use alongside micronance and to what
their main strengths and weaknesses are. We already know that poverty and nancial
exclusion from formal services do not result in nancial inactivity. A recent study by
Collins et al. (2009), based on a meticulous analysis of how the poor manage their cash
ows, has shown that they display fascinatingly intense levels of nancial activity. The
study reveals the existence of complex and sophisticated skills and knowhow, showing
that the poor do in fact plan, calculate and anticipate in their money management.
This study aimed to deepen our understanding of demand for nancial services by
drawing on a case study from rural southern India. This research is part of a larger project
looking to unravel the diversity of nancial landscapes in rural southern India and their
embeddedness within other components of social and economic life. The aim of this
particular paper, however, is quite specic. By applying both descriptive statistics and
qualitative analysis, and focusing on one community among the lowest castes, we
examined loan sources and motivations for borrowing and how they relate to one another.
Hereby, we shed new light on the diversity of local nancial arrangements used by the
rural poor. The study is limited to the lowest castes of four villages in two districts of
North East Tamil Nadu and therefore has no claim to representativeness. We believe,
2
See, for instance, Roodman and Morduch (2009). For specific studies in India, see, for instance, Banerjee et al.
(2009), Garikipati (2008), Pattenden (2010) and Rao (2008).
Copyright 2011 John Wiley & Sons, Ltd. J. Int. Dev. 24, S122S137 (2012)
DOI: 10.1002/jid
S124 I. Gurin et al.
however, that microstudies such as this one can help us understand the diversity and
complexity of realities in the eld.
We found that households juggle with a large range of borrowing sources, each with their
own advantages and disadvantages and seemingly very specic purposes. When choosing a
loan source, economic criteria such as interest rates, transaction and opportunity costs,
durations and modalities of repayment obviously matter. However, we found that social
criteria appear equally fundamental when choosing a loan. Debts and loans differ not only
along technical but also along social lines. For instance, some loans have serious
consequences for status and reputation. Similarly, we found that lenders social control
constrains loan usages. Such social criteria carry costs and risks that borrowers take into
account alongside traditional economic criteria when making the decision to take on debts.
2 THEORETICAL BACKGROUND
Various schools of thought with specic rationales, denitions and objectives have sought
to unravel the determinants of nancial service usage (Johnson, 2005). Neoclassical
economic theory focuses on the questions of economic efciency, collateral, transaction
and information costs. Households are understood to opt for informal credit because of a
lack of formal credit access (credit rationing)3 or because it enables lower transaction and
information costs, because informal credit procedures are usually quicker and simpler.4
Economic anthropology by contrast highlights the social meaning of debt. Individuals
often accumulate debt and credit and repay loans in accordance with their own informal
hierarchies and calculation frameworks (Malamoud, 1980; Bloch and Parry, 1989; Bouman
and Hospes, 1994; Zelizer, 1994; Villarreal, 2004; Gurin, 2006; MorvantRoux, 2006;
Servet, 2006; Shipton, 2007; Gurin et al., 2011). Such phenomena transcend material or
selfcentred motivations and reect questions of status, honour, power and individual as well
as group identity. Money is not entirely fungible: it is earmarked in the sense that different
sources serve various purposes. In such a context, moral factors are argued to be
instrumental in compartmentalising money uses (Bloch and Parry, 1989; Zelizer, 1994;
Shipton, 2007). Along the same lines, political economy sheds light on the social regulation
of nance, examining how institutions such as gender, caste or ethnicity shape the demand
for and access to nancial services (HarrissWhite, 1994; HarrissWhite and Colatei, 2004;
Johnson, 2004; Lont and Hospes, 2004).
Further studies focusing on operational issues without reference to any specic
theoretical school of thought have shed light on various other debt criteria including
negotiability and exibility (Rutherford, 2001; Vonderlack and Schreiner, 2002; Johnson
and Sharma, 2007; Collins et al., 2009), reliability (Bouman, 1989; Collins et al., 2009),
discretion and anonymity (Vonderlack and Schreiner, 2002), as well as structure and self
discipline (Vonderlack and Schreiner, 2002; Collins et al., 2009).
Approaching formal and informal nance along a continuum rather than as distinctive
spheres is further important lesson from political economics and economic anthropology. As
Bouman (1994) has argued, the dualistic view of formal versus informal nance violates the
empirical diversity of nancial landscapes, which are chameleonlike and kaleidoscopic in
nature, catering to every taste, purse and preference (Bouman, 1994, p. 6). In India
3
See, for instance, Hoff and Stiglitz (1990) as well as Conning (1999).
4
See, for instance, Guirkinger (2008).
DOI: 10.1002/jid
especially, various studies have emphasised the dynamism and diversity of Indian informal
nance, highlighting both its strengths and weaknesses (Bouman, 1989; HarrissWhite,
1994; HarrissWhite and Colatei, 2004; Collins et al., 2009).
By drawing on these theories, this article focuses on the differentiation of borrowing
practices according to how the money is used. Following in the economic anthropological
approach, we found that there is indeed a continuum of local nancial arrangements and a
compartmentalisation of borrowing uses. Our ndings suggest that although economic
criteria certainly play a role, the neoclassical economic cost/benet framework is too narrow
and unable take into account the diversity of criteria and rationales underpinning borrowing
practices and strategies.
3 METHODOLOGY AND CONTEXT
We have combined quantitative and qualitative data collected from 2005 to 2006 in four
villages in the southern Arcot region of Tamil Nadu.5 These villages are situated on the
border of the Cuddalore and Villipuram districts and were selected because they cover a
continuous and relatively small area of the dry, rainfed tracts and wet, irrigated areas that
are so typical not only of Tamil Nadu but also of much of southern and central India
(HarrissWhite and Janakarajan, 2004; Djurfeldt et al., 2008). In the rst stage of this
research, qualitative tools were applied to measure the diversity of borrowing practices and
how people talk about debt. This facilitated the design of an effective questionnaire for
gathering reliable, relevant data by using appropriate terms. For instance, asking who do
you obtain money from proved far more efcient than asking to whom are you indebted
(kadangaran). It also proved more useful to adopt the local expression wellknown
persons over moneylender, which has negative connotations. For the second stage of the
study, a quantitative questionnaire was carried out with 212 households randomly selected
from each of the four villages colonies,6 which are the districts of residence of the lowest
castes, and the exuntouchables.7 This survey focused on the question of household socio
economic characteristics and borrowing practices.8 In the third stage of the study,
qualitative analysis was used again for interpreting the quantitative results. We carried out
approximately 20 case studies with low caste households, chosen to reect the diversity
and breadth of the sample population. We met with agricultural labourers, small producers,
urban wage workers and petty entrepreneurs, including both landless householders and
small landowners. There was a mixture of educated and uneducated interviewees. Debt
behaviour was a further selection criterion, given that the quantitative surveys major
purpose was to analyse attitudes and strategies toward debts. We met households with
varying levels of debt that had been derived from a wide variety of sources. Semi
structured interviews were used, where interviewees were rstly asked to list the major
events of their life, such as life cycle events, livelihood changes they had experienced or
migration they had undertaken. They were then asked to describe how they had nanced
each event or noticeable change and to discuss the diversity of their debt relationships,
5
The four villages range in size between 300 and 800 households.
6
This quantitative data was collected by Ophelie Hlis as part of her MPhil research (Hlis, 2006), with the
support of S. Ponnarasu.
7
In the village studied, most of the lowest castes belong to the Paraiyar community.
8
To limit interview duration, the survey was restricted to sums in excess of INR 500. This is a limitation that
underestimates the importance of relatives and friends.
DOI: 10.1002/jid
both nancially (cost, repayment modalities, duration, etc.) and from a subjective
perspective. This nal stage also involved interviews with lenders, who were asked about
their practices in terms of loan terms, cost, duration, collateral requirements and sanctions
for nonrepayment, as well as how they evaluate customer creditworthiness and manage
risk.
The households socioeconomic characteristics are set out in Table 1. Although around
half of them are landless (50.94 per cent), most depend on agricultural income, either as
small farmers (25.73 per cent) or as agricultural workers (54.85 per cent). In most cases,
nonagricultural income requires migration or commuting to nearby small towns.9 The
survey did not quantify income levels, but estimates from qualitative analysis of annual
household incomes suggest an income range of INR 10 00050 000.
4 MAIN OUTCOMES
4.1 Who Issues Credit?
At the time of the survey, 92.4 per cent of the households were indebted. The average
outstanding amount was INR 24 857 (with a median level of INR 15 250), which is around
onehalf to twice the level of annual household incomes. Money had been borrowed from
various sources. Households were on average indebted to 2.72 sources, with a maximum of
20 sources.10 The rst stage of our qualitative analysis helped us to discern seven major
categories of lenders. These are mobile moneylenders (Tandal), who are approached mainly
for small sums and shortterm needs. Shopkeepers also offer small shortterm loans.
Pawnbrokers are also used, with gold as the most commonly pledged asset. There are also
wellknown persons (Terinjavanga), relatives and friends, banks and selfhelp groups
(SHGs; the most common form of Indian micronance) (Roesch and Hlis, 2007).
Table 1. Households profile
Sample (2006)
Household size (avg. number) 4.66
Level of literacy (husband and wife) (%) 68
Concrete housing (% HH) 32.55
Landless HH (%) 50.94
Main source of income (%)
Agricultural production 25.73
Agricultural labour 54.85
Nonfarm labour (casual nonfarm labour, employees, selfemployed) 19.42
Summary characteristics for the households in the sample.

HH, household.
9
Compared with the scheduled caste (SC) population across the whole of Tamil Nadu (source: 2001 Census,
see http://census2001.tn.nic.in/), this population was slightly more educated (63.2% of SC adults across Tamil
Nadu are literate) and owned more land (63% of SC households across Tamil Nadu are landless, as opposed to
50.94% in our sample). It is likely that these differences illustrate both rural/urban diversity and disparities
between districts.
10
The average number of borrowing sources used at a given time, that is, the day of the interview, was 2.7. If we
had documented borrowing practices over a period, the number would be much higher. This was the method used
by Collins et al. (2009), who found that households used between 8 and 10 financial tools.
DOI: 10.1002/jid
Banks, some SHG loans11 and certain kind of pawnbroking are recorded as transactions
and therefore count as formal nance, whereas other borrowing sources are categorised
as informal.
Table 2 summarises major borrowing source characteristics in terms of loan numbers,
percentage of total loans, average amounts borrowed, percentages of families using the
sources, total amounts borrowed as a percentage of the total volume, the mean and median
duration of the loans and the mean and dispersion levels of the monthly interest rates. As is
shown, 26.67 per cent of the loans are taken from wellknown persons, followed by 24.10
per cent from pawnbrokers. Borrowing from wellknown individuals accounts for roughly
half of the total volume of loans, which can be accounted for by the large average amounts
loaned and the high number of families using this source. Although the average amounts
borrowed from pawnbrokers are much smaller, as a source, it still accounts for roughly 20
per cent of the total volume. Over half of the interviewees (55.09 per cent) said that they
held loans from a pawnbroker. SHG borrowing ranks third in terms of loan numbers and
amount borrowed, followed by mobile lenders, family and friends, banks and
shopkeepers. Bank and family loans account for a larger proportion of the total volume
than mobile lending does because the average amount borrowed is higher. Mobile lending,
however, exceeds both categories in terms of the number of loans.
4.2 What is the Credit Used for?
Table 3 states the different purposes for which loans are used in order of importance. As
is shown, most loans are used for household needs (21.15 per cent), followed by
ceremonies (17.57 per cent), health expenditure (13.95 per cent), economic investment
(12.95 per cent) and education (10.77 per cent). A few other categories such as house
purchase, nancing repayments and purchasing cows, land or consumer goods account
for less than 10 per cent of the total.
Table 2. Borrowing sources

Duration
% (no. of days) Price (monthly)
Avg. family %
Source n % amount using vol. Mean Median Mean Disp.
Wellknown persons 208 26.67 17 433 45.22 45.03 689 600 3.74 1.26
Pawnbroker 188 24.10 8 000 55.09 18.57 624 334 2.83 0.48
SHG 132 16.92 8 431 38.85 13.82 291 237 1.71 0.58
Ambulant lenders 122 15.64 1 557 33.12 2.36 246 235
Family and friends 59 7.56 10 274 14.64 7.52 423 239 2.96 1.52
Bank 57 7.31 16 701 17.52 11.82 783 450 1.06 0.46
Shop 14 1.79 4 907 4.14 0.85
Summary statistics for borrowing purposes. We report the number of loans (n), frequency (%), average amount,
percentage of each source compared with the total number of loans, percentage of families using each source,
percentage of each source compared with the total volume of loans, duration (number of days), price (monthly
interest rate). Data on prices is missing for ambulant lenders as in many cases borrowers do not know the exact
price and for shops as loans are usually free of cost.
11
Selfhelp groups are microbanks composed of 15 to 20 people. They manage two types of loans: informal
internal loans based on members savings, and formal external loans provided by banks.
DOI: 10.1002/jid
Table 3. Borrowing purposes

Purpose n % Avg. amount Med. amount Min. amount Max. amount
Household 165 21.15 2 724 1 000 500 40 000

Ceremonies 137 17.57 13 143 9 000 500 100 000
Health 106 13.95 7 804 4 000 500 60 000
Investments 101 12.95 12 843 10 000 500 110 000
Education 84 10.77 11 354 5 000 500 70 000
House 58 7.44 17 311 10 000 1000 200 000
Repayments 56 5.90 10 202 8 000 800 60 000
Cow 30 3.85 13 700 12 000 4000 40 000
Other 25 3.21 18 264 15 000 500 100 000
Land 12 1.54 17 333 17 500 1000 40 000
Consumer 9 1.15 7 055 6 000 3000 16 000
Unknown 7 0.90 18 500 11 000 4000 40 000
Summary statistics for loan purposes. We report the number of loans (n), frequency (%), average, median,
minimum and maximum loan amount for each source and each purpose. Purposes were ranked according to
frequency.
Household needs incorporate a large range of domestic goods such as food, soap,
kerosene and washing powder. Because income levels are low and highly volatile because
of agricultural seasonality, borrowing to make ends meet is a very frequent practice.
Ceremonies include life cycle events and religious festivals. Expenses for these are
quite high in relation to income. For instance, marriage costs range from INR 10 000 to
200 000. The fundamental importance of ceremonies, both socially and economically, has
been extensively documented (Heyer, 1992; Kapadia, 1996). Prestigious festivities are a
source of honour and esteem. For instance, marriages are used as indicators for the
quality (tharamana) and status (anthasthu) of the family. People also comment that
marriages are benecial for the extension of social relationships (bandham valara). They
also represent a form of selfinsurance, both for the couple and their parents, who can
expect to be supported in their old age by their children and their spouses.
As far as health is concerned, public health access is ofcially free of cost. In practice,
however, households spend substantial amounts on health care. Not only is public health
care far from cost free because of widespread corruption but also increasing numbers of
people, including the poor, are nowadays using private services, even if this means going
deeper into debt (Peters et al., 2002, p. 143). A similar pattern is seen with education, with
impressive amounts spent on private schooling. Here too, the poor are no longer an
exception (Heyer, 1989).
Economic investments are mainly for agriculture, primarily for crops, fertiliser, labour
costs and bore well maintenance and, sometimes, investments such as bore well digging
and tractor or bullock cart rentals.
4.3 Different Loan Sources for Different Purposes
This section uses both statistical and qualitative analysis to examine how the purposes for
taking out loans differ according to the loan sources. Table 3 sets out the relative
frequencies of purpose for each loan source and analyses whether these vary according to
the source by using nonparametric tests. Our qualitative analysis meanwhile gives a wide
range of economic and social factors associated with each loan source.
DOI: 10.1002/jid
As Table 4 demonstrates, loan purpose frequencies vary greatly depending on the loan
source in question. For example, out of the total sample (column 1: all), 21.15 per cent of
the loans are used for household expenditures, yet this accounts for only 5.77 per cent of
the usage of loans sourced from wellknown individuals (column 2). As such, household
expenditures as a category is considerably underrepresented here, suggesting that
household expenditure loans are not generally nanced by wellknown persons.
Ceremonies as a category are meanwhile greatly overrepresented here, with the
implication that wellknown individuals are taken as an important source for nancing
ceremonies.
Further, noteworthy entries are equally highlighted in bold in Table 4. For example, we
can see that in relation to the total sample, pawnbrokers are a more frequent loan source
for household and health expenditures. Similarly, SHG nance is more regularly used for
cow purchases and other investment goods and less used for ceremonies and health.
Mobile lenders are a source of emergency funding for covering such requirements as
household and education expenses. Family and friends are an important loan source for
ceremonies, health and housing maintenance costs. Banks are mainly used for
investments, house purchases, existing loan repayments and cattle purchase. Shops are
used only for household and consumer good expenditures.
The Pearson and likelihood ratio statistics are both inferred from nonparametric
tests, which assert the null hypothesis that the distribution across purpose categories for a
given source is the same as the distribution for the entire sample. These statistics
demonstrate that the distribution across purposes is signicantly different from that across
the entire sample. The exception is for the family and friends groups, where the
distribution across purposes does not signicantly differ from the total sample distribution.
An overall independence test between the loan sources and loan purposes returns a highly
Table 4. Does loan purpose differ by loan source?

Well Family
known Ambulant and
All person Pawnbroker SHG lender friends Bank Shop
Household 21.15 5.77 25.53 22.73 45.08 20.34 5.26 35.71

Ceremonies 17.56 27.88 16.49 14.39 11.48 23.73 1.75 0.00
Health 13.59 15.38 16.49 9.85 10.66 15.25 14.04 0.00
Investments 12.95 9.13 13.83 14.39 9.84 8.47 35.09 0.00
Education 10.77 10.58 12.77 10.61 13.93 8.47 3.51 0.00
House 7.44 13.46 5.85 4.55 1.64 10.17 8.77 0.00
Repayments 5.90 4.81 5.85 6.06 5.74 5.08 12.28 0.00
Cow 3.85 1.92 0.53 12.12 0.00 1.69 14.04 0.00
Other 3.21 5.29 1.60 4.55 0.82 3.39 3.51 0.00
Land 1.54 3.37 0.53 0.76 0.82 3.39 0.00 0.00
Consumer 1.15 0.00 0.00 0.00 0.00 0.00 0.00 64.29
Unknown 0.90 2.40 0.53 0.00 0.00 0.00 1.75 0.00
Pearson 90.39*** 19.77** 37.85*** 63.66*** 7.04 65.55*** 504.93***
LRstat 96.81*** 25.49*** 33.26*** 67.01*** 8.07 62.23*** 95.50***
We report purposes frequencies for different loan sources. Purposes were ranked according to frequencies.
Pearson tests the null that the distribution across different purpose categories for a certain source is the same as
the reference category all. LR is the likelihood ratio or Gtest that also tests the null of independence between two
loan source categories.
SHG, selfhelp group.
***denotes statistical significance at the 1% level.
DOI: 10.1002/jid
signicant statistic (729.60) and likelihood ratio statistic (317.87), indicating that
purposes and sources are clearly not independent variables. Our analysis shows that a wide
variety of sources are used according to the purposes for which the loans are sought. We
now discuss the diversity of the loan sources in turn, considering their respective social
and economic strengths and weaknesses.
4.3.1 Wellknown persons: Life cycle events

Wellknown persons (Terinjavanga) represent a major loan source of cash for large
expenses, accounting for 45.03 per cent of the total populations outstanding debt, with
approximately half of indebted households holding at least one outstanding loan from a
wellknown person, and the average amount owed is INR 17 433. This debt relationship is
often just one component of a larger relationship, which often comes close to a form of
patronage and which is embedded within local social relationships, and in particular caste
relationships.
From the borrowers perspective, there are both advantages and drawbacks to these kinds
of loans. Loans from wellknown persons are often well suited for large expenditures such
as those incurred for ceremonies, hospitalisations and fees for private schools. There are a
number of reasons for this. Lenders do not ask for material collaterals. There can be a rather
long loan duration (an average of 689 days), which is not always specied at the outset and
is likely to evolve over time according to the constraints of both borrowers and lenders. The
principal is usually repaid in bulk at the end. Such repayment modalities t well with the
irregularity of households cash ows because of agricultural work and migration. Another
fundamental advantage is that many wellknown persons more readily issue loans for
ceremonies, which is one the most common uses for these loans (27.88 per cent). As
benefactors, wellknown persons will not only be invited to the event but also are publicly
recognised as guests of honour. This serves both to strengthen their reputation and to
subsequently enforce repayments. Their help becomes general local knowledge, and
borrowers can no longer escape their commitments. In some cases, these nancial ties also
facilitate access to other resources, in particular land and labour, and access to governmental
schemes. Many wellknown persons are local landowners who prioritise lending money to
their labourers and to their tenants through sharecropping contracts. Some of them are also
inuential political leaders who can facilitate access to governmental schemes. Last but not
least, these loans also contribute to a certain form of social recognition in local public arenas.
In contrast to other potentially dishonouring forms of debt, indebtedness to a wellknown
person is a mark of trustworthiness and good name. Such debts, when they are publicly
known, are likely to strengthen the borrowers reputation.
The other side of the coin is, of course, as with any form of patronage, the multiple costs
of such nancial ties. Financially speaking, these loans are the most expensive (3.74 percent
on average but with a high dispersion and a range of 010 per cent), but money is only
one part of the cost. The debt is also repaid with labour, produce, services, loyalty and
respect. The lenders generosity and exibility proves his or her role as protector, and this
protection is repaid in material and symbolic forms of compensation. These include
carrying out favours or giving free assistance at a moments notice, such as helping with
domestic tasks to cover sickness or ceremonies. Services may be provided, for instance,
by making purchases on behalf of the lender at subsidised shops, saving the lender the
effort of queuing and equally the feeling of dishonour of buying subsidised items. Lenders
also demand recognition and gratitude: as discussed previously, lenders must be invited as
guests of honour to ceremonies. In addition to the nancial costs and social costs
DOI: 10.1002/jid
discussed previously, there is also an additional opportunity cost because of length of the
bargaining process and length of the borrowing relation. Borrowers are perfectly aware of
these additional costs and are prepared to put up with them. Their only room for
manoeuvre is to seek to steer the relationship to their own benet. Others refuse to
comply, but this means turning to alternative sources, such as the sale of assets, migration
or seeking a regular income.
4.3.2 Pawnbrokers: Smoothing income

Pawnbroking accounts for a major part of borrowing practices. Although 24.10 per cent of
all loans are derived from pawnbrokers, they account for 18.57 per cent of the total loan
volume. Almost any asset can be pledged, but gold in the form of jewellery is obviously the
most common. In Boumans analysis of the nancial strategies of rural Indian families, he
described gold as everyones piggybank (Bouman, 1989, p. 71). Gold has the advantage
of combining prestige, speculation (the price of gold doubled between 2002 and 2006) and
liquidity, meaning that it can be pawned if needed.
There are pawnbrokers in every small town, meaning they are wellestablished loan
sources. Borrowers have to travel to them, which can be costly, although the distances are
little in excess of 10 km and transport infrastructures are quite good. The amounts loaned
are necessarily limited (INR 8323 on average) as they depend on households property.
The loans durations, too, are limited and cannot exceed 1 year. In contrast, borrowing from
outside ones village also allows for more discretion. Nobody will point the nger at you
was a regularly used expression when asking the clients for the reason they seek
pawnbroking. Another perceived advantage of this loan source is reliability, and
procedures are very simple. With an average monthly interest rate of 2.83 per cent,
pawnbrokers rates are cheaper than that of wellknown persons and mobile lenders, but
they are more expensive than that of banks and SHGs. Regardless of the amount loaned,
interest rates are known and somewhat xed: as Table 2 shows, price dispersion is the
lowest for pawnbrokers. Regular and loyal customers may obtain slightly cheaper rates
and larger amounts, but bargaining is neither a rule nor an obligation.
Besides anonymity, low interests and ease of procedure, there are some additional
benets to pawnbroking loans. There is no need to justify the loanyou can use the
money as you wish. Pledging gold also has the further fundamental advantage that being
based on collateral, it is taken as a right. People say that it enables stable and decent
relationships and that it is compatible with selfrespect (mariyaathai). If there is a failure
to repay, there is no judgement of the family and its capacities. People do risk the loss
of their jewels, and this does happen. In our sample, 48.21 per cent of pawnbroker loans
exceeded 1 year, meaning that those borrowers lost their jewels, but they can repurchase
them once they have the necessary cash in hand.
For all of these reasons, pawnbroking plays a fundamental role in households cash ow
management. Such loans are mainly used to smooth consumption and for signicant
expenses such as ceremonies and health, often in conjunction with other nancial tools.
4.3.3 Selfhelp groups

At the time of the survey, 38.85 per cent of the indebted households have an outstanding
loan with a SHG. This illustrates the very high penetration rate of the SHG movement in
Tamil Nadu (Fouillet, 2009; Srinivasan, 2009). SHG loans amount to 16.92 per cent of the
total number of loans but only 13.82 per cent of their volume, as they are limited to
relatively small amounts (INR 8431 on average). Although micronance loans are
DOI: 10.1002/jid
ofcially meant to promote livelihood diversication and selfemployment, 14.39 per cent
are in practice used for investments and 12.12 per cent for livestock, mainly for milking
cows for personal consumption. Otherwise, the most common uses are household
expenses (22.73 per cent), ceremonies (14.39 per cent), education (10.61 per cent) and
health (9.85 per cent). Cost is the main advantage of SHG loans (1.71 per cent on
average). However, the opportunity costs are often also rather high, in particular because
of the time taken for participation in group meetings. The loan amounts are necessarily
limited, not only because of the ofcial rules12 but also because of the repayment
modalities. The principal and interest must be repaid monthly, without any exibility, yet
most households have to face very irregular incomes because of agricultural work and
migration. The SHG loans encountered in this case study were tightly controlled and
monitored. Most micronance organisations require their clients to concentrate on
productive loan usage and to avoid lavish and unsustainable expenses, such as
ceremonies. Although the SHGs do not necessarily respect the NGOs policiesfor
instance, a signicant number of loans are used for purposes other than economic
investmentthe NGOs usually exert strong social pressure. SHG loans are described with
mixed feelings. Some people appreciate this new safety net, and that allows them to limit
their dependency, particularly upon their relatives. Others complain of the social control
exerted by the group, with some SHG members describing the feeling of begging from
their peers.
4.3.4 Mobile moneylenders: Emergency loans

Mobile moneylenders are mainly used in emergencies, issuing loans and collecting
repayments at the households doorsteps. They work with small loan amounts (on average
INR 1500), which are loaned over short periods (246 days) and repaid weekly or daily.13
These loans are expensive compared with other sources, and in many cases, borrowers are
unaware of the exact price of the loan. Qualitative analysis indicates the equivalent of a
monthly interest rate usually ranging from 4 per cent to 10 per cent but which sometimes
exceeds this. No collateral is normally required, but the high interest rates are viewed as an
impediment to taking on large loans. Enforcement mechanisms include regular visits, the
promise of future loans, forms of social pressure and, sometimes, acts of coercion. People
often state that these loans are a last resort option, both because of the price and because of
the lack of respect shown by the lenders. Mobile moneylenders themselves clearly state
that they sometimes use public denunciation and aggressiveness as a repayment
enforcement tool. Table 4 shows that roughly half of these loans are used for everyday
consumption expenditures. These are followed by small amounts taken for education costs
such as bus fares, books and school fees. There are equally social expenses, such as gifts
for ceremonies organised by others, and health expenses for medicines and medical
consultations. Around 10 per cent of these loans are used for business investment
purposes. This includes the creation of small local shops such as grocery stores and cycle
repair shops where there are signicant cash ow needs. The availability and
responsiveness of mobile moneylenders gives an undeniable comparative advantage over
other cash options, and they are often the only solution in an emergency. People
12
At the time of the survey, the maximum allocation allowed per group of 12 to 20 members was INR 100 000.
Groups were encouraged to limit individual loans to INR 20 000.
13
Officially, loans are for a period of one hundred days, but many borrowers take another loan before repaying
the previous one.
DOI: 10.1002/jid
themselves are very clear about this. As we were once told, you cannot have the cream
without the moustache, referring to how mobile moneylenders have both strengths, in the
form of their availability and responsiveness, and weaknesses in terms of the high loan
cost and their aggressiveness.
4.3.5 Kinship and neighbours: Social control

Loans from relatives and neighbours amount to a small proportion of the total outstanding
loans, both in volume (7.52 per cent) and in number of loans (7.56 per cent). Interestingly
they are not cost free and come with an average interest rate of 2.96 per cent. Qualitative
analysis clearly shows up reservations and suspicions towards indebtedness to family.
Many people explain that they prefer going into debt outside of their family circle. This is
a matter of freedom, as kinship support implies continuously justifying expenditures
(niyayapaduthanum). The obligation of reciprocity (tiruppu) is also considered a burden.
If the debt is given cost free, there is the implication that the debtor should be able to lend
money in return when the creditor is in need. Borrowing from neighbours raises similar
issues, with many people preferring to keep their distance and avoid interference. I dont
want to see my lenders face every day is a common comment.
4.3.6 Banks
At the time of the survey, 17.52 per cent of the households had an outstanding bank debt.
Many rural area bank loans come under the framework of governmental agricultural
schemes. This explains why, nancially speaking, banks loans offer the best conditions.
There are low interest rates (1.06 per cent on average), signicant amounts lent (INR 16 701
on average) and rather long loan durations (783 days on average). As the main purpose of
governmental credit schemes is to support economic investment, here such investments are
the most frequent loan purpose across all the loan sources (35.09 per cent). In contrast, bank
loans remain a form of privilege, with the two main access conditions of physical collaterals
in the form of land, housing or jewellery, and of social capital. Knowing someone from
the bank is often a key condition to acquire such loans.
5 CONCLUSIONS
This study shows that there is a highly diversied nancial landscape where households
use various borrowing sources, and each serves a very specic purpose. Mobile lenders
are well suited to emergency requirements. Pawnbrokers play a fundamental role in
topping up and smoothing income. SHGs are in fact used in a similar way and also to a
certain extent for economic investments. Wellknown individuals are mainly approached
for longterm and large loans, especially for nancing ceremonies. Bank loans remain
the primary source of funding for economic investments. Economic and technical criteria
such as price, transaction costs, loan availability, duration and repayment modality
suitability in relation to income cash ows largely account for these differentiations.
Social criteria also count, however, in particular the loans consequences for the
borrowers reputations and count the extent to which the lender can control how the
money is used.
This case study is limited to the lowest castes of four villages of Tamil Nadu and is not
representative of rural areas across South India, let alone of the poor in general. Our main
purpose has been to illustrate the complexity and the diversity of these local nancial
DOI: 10.1002/jid
arrangements and the wide range of criteria governing how people make decisions and
how they consider and experience the different nancing options available to them.
Most studies and debates on nancial inclusion contrast formal and informal
nance.14 As already argued by many studies drawing on economic anthropology, this
dualistic classication is of little help in explaining the concrete modalities of nancial
transactions. The formal sector is usually associated with transparency, reliability,
contracts and longerterm projects. In contrast, the informal sector is often thought of as
shortterm, insecure, unreliable and enmeshed with social relationships (Collins et al.,
2009). In our case study, the practices prove much more complicated, as most lenders
combine both the socalled formal and informal characteristics.
What is also clear is that most of these borrowing sources are costly, both on a nancial
and on a social level (HarrissWhite, 1994; Shah et al., 2007). In our microstudy, well
known persons represent the most important source of cash, and many of these lenders
deliberately use debt to tie down labour, restrict land access or build political allegiances.
Most of these nancial ties are also shaped by caste relationships: upper castes such as
Naidus, Reddiars, Chettiars or Marwaris lend to lower castes, whereas the opposite
scenario is very rare. In contrast, borrowing signicant amounts from relatives and friends
is in fact rather unusual. Further research is needed to explore in more detail how debt
shapes social inequalities and the segmentation of debt along social lines such as caste,
class and gender. The evolutionist scenario, which argues that formal nance (including
micronance) could gradually replace informal nance (World Bank, 2007; Collins et al.,
2009), looks unconvincing. As long as poor rural Indian households lack access to social
protection and employment securityand unfortunately, this is unlikely to take place
soonlocal nancial arrangements such as those described here offer many comparative
advantages. Therefore, the different formal and informal loan sources that are available
today will persist and expand. As Copestake (2010) argued, micronance should be
appraised against countryspecic historical realities and set into a broader perspective
taking into account in a given context both the evolution of welfare policies and local
nancial markets, both formal and informal. This microstudy conrms the dysfunctional
nature of local nancial markets while emphasising their relative efciency in a given
local socioeconomic context.
In line with other studies of the same region (Kalpana, 2008), we have also found that
the bulk of loan demandsincluding with SHGsrelates to purposes that do not
generate direct income, be these household necessities, ceremonies, health costs, the
repayment of past debts or education costs. In the medium to long term, some of these
expenses certainly have positive material implications. It is, however, clear that despite
ofcial discourses presenting micronance as an efcient tool to release the
entrepreneurial creativity of the poor, this is far from widespread, as this case study
has shown. In a recent paper, Karnani (2009) cautioned against the risks of viewing the
poor as resilient and creative entrepreneurs and value conscious consumers while
arguing that this view plays down the critical role and responsibility of the state for
reducing poverty.
This case study demonstrates that such concerns indeed seem justied and that there is a
real need for a better understanding of the actual uses of microcredit and their implications
for the wellbeing of the clients.
14
See, for instance, World Bank (2007) and Nabard (2008).
DOI: 10.1002/jid
ACKNOWLEDGEMENTS
We thank Isabelle Agier, Marek Hudon, Marc Labie, Solne MorvantRoux, Cyril Fouillet,
Ariane Szafarz and JeanMichel Servet for their comments on an earlier version of this
paper. Any deciencies remain as the authors responsibility.
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Journal of International Development

J. Int. Dev. 24, S122S137 (2012)

CREDIT FROM WHOM AND FOR WHAT?

Abstract: This article aimed to deepen understandings of poor household borrowing

Keywords: informal finance; microfinance; development studies; economic anthropology

Copyright 2011 John Wiley & Sons, Ltd.

3 METHODOLOGY AND CONTEXT

4.1 Who Issues Credit?

Table 1. Households profile

Summary characteristics for the households in the sample.

4.2 What is the Credit Used for?

Table 2. Borrowing sources

Table 3. Borrowing purposes

Household 165 21.15 2 724 1 000 500 40 000

4.3 Different Loan Sources for Different Purposes

Table 4. Does loan purpose differ by loan source?

Household 21.15 5.77 25.53 22.73 45.08 20.34 5.26 35.71

4.3.1 Wellknown persons: Life cycle events

4.3.2 Pawnbrokers: Smoothing income

4.3.3 Selfhelp groups

4.3.4 Mobile moneylenders: Emergency loans

4.3.5 Kinship and neighbours: Social control

Armendriz B, Labie M (eds). 2011. Handbook of Micronance. World Scientic Publishing:

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