Being Credit Rationed: Delay and Transaction Cost

Abstract

This paper develops alternative models explaining why households with credit need to finance their projects (enterprises) avoid formal credit. More importantly it argues that the problem of avoidance of formal credit and ensuring credit access is not necessarily restricted to the small borrower or borrowers with inefficient projects. Delay cost and personal loan transaction cost may also cause highly productive projects or larger projects shying away from formal credit in spite of low interest rates. Some of the policy implications of the above findings are also discussed.