Microfinance in India: Small, ostensibly rigid and safe

Abstract

Microfinance in India, finds itself at the crossroads today. Microfinance Institutions that are Grameen replicators in India, using a for-profit Non-Banking Finance Company legal form, have grown rapidly in terms of client numbers. To meet these numbers, the sector has been on a commercialization spree, and in the process, facing flak for unsound lending practices. Loan sizes are still relatively small compared to client per capita income, while portfolio quality was until recently, very high. There is evidence in the field of multiple borrowing, with clients borrowing simultaneously from multiple micro-finance institutions. We build a behavioral model of the microfinance sector that explains why such multiple borrowings result optimally in small loan sizes and masks portfolio quality leading to high reported portfolio quality, to meet the needs of commercial viability in this sector.