Informal lenders and small/marginal farmers in India: an unregulated sociological symbiotic relationship?

n the context of lending in developing countries, formal and informal sectors co-exist, although there are major differences in the interest rates charged. This is compounded by the paradigm of imperfect information, legal monitoring and enforcement that explains the sectors’ underperformance and strained co-existence (Hoff and Stiglitz, 1990; Conning, 1996; Bell et al., 1997; Madestam, 2014). Despite the tacit acknowledgement of the importance of formal and informal finance, 1 the plight of marginal farmers has not received much attention in empirical or theoretical underpinnings or within microfinance literature (Ghatak and Guinnane, 1999; Ghatak, 2000; Sandhu, 2007; Chaudhuri and Dwibedi, 2014). The economic and strategic significance of informal lending and borrowing for the farming sector in developing economies has been overlooked in the finance literature. This study attempts to overcome the gap within the extant literature and in particular investigates how informal providers make lending decisions for small/marginal farmers. This chapter, therefore, examines the unique structural characteristics of informal lenders such as retail merchants (arthiyas), local private moneylenders (sahukars), wealthy entrepreneurs, wholesale sellers, friends and family in comparison with their formal counterparts. The survey and analytical results indicate that informal financing from moneylenders and family friends, at least in India, is significant. We find evidence of a small farm bias, for whom the majority of income comes from agriculture produce that is seasonal, hence dependents are more likely to use informal financing. The evidence shows that …