A Thesis submitted in partial fulfillment of the requirement for the award of the Degree of Master of Science, School of Engineering and Technology

Thesis (M.Sc.) - Asian Institute of Technology, 1991

With forma l credit institutions imposing stringent requirements for loan disbursal, l ow-income families in urban areas have increasingly found themselves sidelined in the process of credit delivery by the formal credit sector. These institutions are also bogged down in their functions by government regulatory controls, interest rate limits, loan ceilings , collateral requirements, high administrative and procedural costs a nd so on. These problems consequently reduce their share of credit markets leaving a large gap in the demand and supply of credit. This is where the informal credit markets [ ICMs ] come in . With advantages of unregulated money supply , easy accessibility, easy . liquidity, l ow " administrative " and procedural costs, little or no collateral, flexibility in interest rates and repayment schedules, ICMs are ideally suite d to cater to the needs of urban low-income families. There is no doubt that ICMs serve to fill a large gap in the supply and demand of credit , especially for the lower income groups, who are beyond the reach and coverage of the formal credit institutions. The main objective of this study has been to characterize the supply and demand of informal credit (especially the link between the ICM and housing finance ), resulting in the development of a typology of the different credit suppliers operating in the study area, Bangalore City, in Karnataka State , India. This typology has been placed in a continuum to obtain a perspective of the informality of credit. Housing represents the single largest investment made by a low-income family and the process of mobilization for them is complex a nd spread over a long period of time. With this in mind, the other objective of the study was to under stand the forces a nd processes involved in the development of a settlement so that a profile could be built. There is a distinct relationship between the settlement development and avail ability of different types of informal credit. The incre1rren tality of housing needs of the low-income families (where the house is built in several s mall consolidative stages), is particularly matched by the supply characteristics of the ICM (which supplies for example, s mall and short term loans ). The study proposes, as a conclusion , a credit delivery model, in the form of a Precedence Network, which takes into account the key characteristics studied in the ICM typology and the settlement development profile, and envisages a system of dovetailing formal sources of credit, along with informal credit, for the housing activities of the squatter households.