Incentives and Performance of Agents in a Microfinance Bank

Surajeet Chakravarty, Sumedh Dalwai and Pradeep Kumar
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Surajeet Chakravarty: University of Exeter
Sumedh Dalwai: University of Exeter
Pradeep Kumar: University of Exeter

No 2002, Discussion Papers from University of Exeter, Department of Economics

Abstract: An important aspect of providing credit to the poor is the mechanism adopted by the credit institutions to do so. Most microfinance banks use field agents to acquire new borrowers, manage the account and collect repayments. How does the supply of credit change with a change in incentives provided to such field agents? Mann Deshi Bank, a microfinance bank in India, changed its remuneration scheme from a pure commission based to a mixed scheme with a combination of a base salary and other incentives. This paper examines the effect it had on the effort and the performance of the agents by using a rich panel data on the bankÕs joint liability lending product. The results show that the change in the contract form with a large flat wage and reduced incentives improved performance of the agents in terms of the quantity (increase in the number of borrowers acquired) and quality (the borrowers acquired had fewer delays in repayments). We find evidence of mixed contract agents exerting significantly more effort than the pure commission agents to ascertain borrower quality.

Keywords: Micro-finance institutions; joint liability loans; labor contracts; moral hazard (search for similar items in EconPapers)
JEL-codes: G21 J41 O12 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ban, nep-cta, nep-dev, nep-lma and nep-mfd
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