Determinants of loan repayment performance among borrowers of microfinance institutions: Evidence from India. (March 2016) - Mirpourian, Seyedmehrdad
Highlights: This paper investigates the repayment behavior of borrowers of a nonprofit Indian microfinance institution, Indian Institute for Mother and Child. The dataset focuses on the characteristics of the loan. This allows to eliminate the noise stemming from individual borrowers' characteristics. Empirical results show that the repayment rate improves as borrowers get closer to the loan limit, which is the maximum available loan. The main result hints at a relevant role played by motivational effects in fostering the probability to fully and timely repay a loan. Our findings suggest that leveraging on the maximum loan limits that can be reached by individual borrowers may represent a possible policy instrument. Abstract: A better understanding of loan repayment behavior of borrowers can contribute to the development of microfinance. This paper investigates the repayment performance of borrowers of a nonprofit Indian microfinance institution, the Indian Institute for Mother and Child – IIMC, using a novel data set. We collected raw data on more than 1600 borrowers, covering a period of more than three years. The data collection focused on the installments of those borrowers who at first received a loan lower than the loan limit, but then reached the loan limit within the time span considered. The final sample for the empirical analyses is homogeneous in terms of borrowers' characteristics and includes the installments of 373 loans. We focus on a relatively neglected issue in the microcredit literature, viz. the motivation of the borrower for receiving future loans. In addition to borrowers' characteristics, we analyze the motivational issues that may influence the probability that the loan is fully or partially repaid, and the time horizon over which it is repaid. Empirical results show that the repayment rate improves as borrowers get closer to the loan limit, which is the maximum available loan. In other words, motivation for reaching the maximum loan level is positively associated to the repayment performance.