This paper studies how the expansion of formal banking affects interest rates in informal credit markets. Using the Reserve Bank of India's 2005 Branch Authorisation Policy, we exploit quasi-experimental variation in bank branch expansion across districts in a fuzzy regression discontinuity design.
We find that moneylender interest rates decline by approximately 19% in treated districts five to eight years after the policy. The results are consistent with increased competition from formal banks reducing the market power of informal lenders, with limited evidence supporting a dominant adverse selection mechanism.