In the presence of the formal credit, a market for informal credit exists because the supply of formal credit is inadequate or because formal credit is not available at the beginning of the crop cycle. A theory of interest rate determination in the informal credit market may be presented, where there exists delayed disbursement of formal credit and an alternative explanation may be provided for the prevalence of high interest rate in the informal credit market where price and credit subsidy policies of the governments are responsible. But it is also interesting to consider cases where formal credit is available on time, but it is inadequate in supply.

Despite the provision for adequate supply of formal credit made by the government, the actual amount of disbursement of formal credit to the farmers depends upon the decision of the officials of the formal credit agencies. The simplified story of interest rate determination in the informal credit market when the official of the formal credit institution rations the supply of formal credit goes as follows. The representative farmer has two sources of credit. The official controls the supply of formal credit and receives a bribe from the moneylender in the case of inadequate supply of formal credit to the farmer. However, there is a positive probability of paying a penalty if the supply of formal credit to the farmer is inadequate. The moneylender and the official then play a cooperative game and maximise their joint income choosing jointly the amount of formal credit and the interest rate. The maximised joint income is then distributed between the two players and the transfer from the moneylender to the official may be described as bribe.

Under such a condition, development policy like a credit subsidy policy reduces the informal interest rate and increases the amount of formal credit disbursed by the official and also reduces the bribe income of the officials. Besides, any attack on the demand side to combat corruption actually succeeds in reducing the informal interest rate and raises the amount of formal credit given to the farmers. The agricultural productivity and the welfare of the farmers also increase. However, a price subsidy policy on the contrary raises the informal interest rate, reduces the volume of formal credit disbursed to the farmer and also raises the bribe income of the official. So there is necessity of a credit subsidy policy when its desirability is questioned in India in the spree of globalisation.

It may be also interesting to study the situation when the official of the formal credit official often deliberately undertakes dilatory tactics with a view to forcing the offer of bribes from the farmers.

Interest rate in the informal credit market can also be determined when the official of the formal credit institution rations the supply of formal credit. When the representative farm has two sources of credit, both the formal and informal sources may be either substitutes or complements to each other. An official, who takes a bribe from the farmer, controls the supply of formal credit. The official has no control over the actual interest rate in the formal credit market, which is administratively determined. However, the effective interest rate in the formal credit market must include the bribe and the official concerned determines the bribing rate. The moneylender on the other hand, determines the interest rate he charges for informal credit. Thus the official and the moneylender play a non-cooperative game, choosing the amount of formal credit and the informal interest rate.