Formal banks, semi-formal SHGs or informal moneylenders, who is better? a study of borrower credit preference in India

The present study explores the factors driving borrowers' preference for formal banks, self-help groups (SHGs) and moneylenders. The study is based on a systematic survey of 839 rural borrowers from southern India, sampled from four districts with varied levels of credit access (surplus, constrained and moderate credit). The data was analysed using multinomial logistic regression in SPSS. Results show how banks and moneylenders exclude borrowers based on relative wealth and gender. SHGs service women borrowers but are preferred more by wealthier borrowers, highlighting intragroup inequalities. Yet, the three lenders service a variety of purposes, justifying their demand in the market. The study enhances understanding of rural borrowers' constraints concerning various credit sources. The implications of this study are as follows: one is identifying the lacunae in the formal banking system, which policy amendments could address. Two, the study recommends an investigation of intragroup inequalities within SHGs. Third, the study underscores the demand for multiple players in the rural credit markets and their contribution to the borrower's credit needs.