Loan repayment behavior among the clients of Indian microfinance institutions: A household-level investigation

ABSTRACT

This study focuses on repayment risk associated with microfinance institution (MFI) lending in India. While identifying the determinants of loan delinquency, it divulges features that tend to create repayment differences between the low and high income client households. Primary data of 498 households collected from two Indian states are analyzed using descriptive statistics and logistic regression. The study examines the role of household characteristics, loan characteristics, moral hazard features, and the regional attributes in loan delinquency behavior. The findings ascertain that the households having low incomes, high indebtedness and greater loan diversion, and experiencing high costs of borrowing are prone to greater default probabilities. Contrarily, those having higher financial literacy with a feeling of social cohesiveness and joint liability are likely to be less delinquent. Absence of MFI supervision is a critical factor for loan delinquency. However, MFIs’ biases against poverty lending are possibly over-emphasized. With proper supervision and measures to check unproductive loan utilization, the repayment propensity is likely to improve.

KEYWORDS:

• Loan delinquency
• India
• microfinance institutions
• moral hazard
• poverty lending

APPENDIX

Figure A1. ROC curves for loan delinquency model regressions.

ROC curve: Model 1(A) (Table 5) ROC curve: Model 1(B) (Table 5) ROC curve: Model 2 (A1) (Table 6) ROC curve: Model 2 (B1) (Table 6) ROC curve: Model 2 (A2) (Table 6) ROC curve: Model 2 (B2) (Table 6) ROC curve: Model (Poor households) (Table 7) ROC curve: Model (Non-Poor households) (Table 7)