Social Networks Behind Trade Credit Guarantee Networks

Abstract

Trade on credit is a very common practice among industry participants both in less developed countries and advanced economies. The non-branded readymade garment manufacturing industry in Metiabruz and its adjoining areas of Kolkata is one of the largest such industries in India, where input sellers of the industry often extend trade credit to their buyers, i. e, manufacturer-cum-producers of the industry. In addition to that producers often extend trade credit guarantee facility among themselves and use their own social network for accessing and providing it. Out of a sample of eighty firms in Metiabruz, the seventy-one firms had acted as guarantors for around two to three firms on the average in the last two years, and seventyseven firms had asked around three to four other firms to act as guarantors. It has been seen further from the primary survey that guarantors and the producers, who take trade credit guarantees from them, are tied by various kinds of social relationships and use these social ties for accessing trade credit guarantees. The central focus of the paper is to study the role of social networks behind this trade credit guarantee system. Empirical findings show that the producers who want trade credit guarantees often use their family ties, friendship ties and friends of friends for getting trade credit guarantees. Presence of social networks here enables producers to establish their creditworthiness as a potential borrower to a guarantor and makes this informal credit system a successful one.