Creditworthiness of a Borrower and the Selection Process in Micro-finance: A Case Study from the Urban Slums of India

Sohini Paul
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Sohini Paul: The author is a Fellow at the National Council of Applied Economic Research, New Delhi, India, email: spaul@ncaer.org

Margin: The Journal of Applied Economic Research, 2014, vol. 8, issue 1, 59-75

Abstract: This article examines whether urban micro-finance institutions (MFIs) consider proxy/hidden collateral in the absence of physical as well as social collateral in judging the creditworthiness of a borrower. MFIs operating in urban slums often adopt an individual lending mechanism since borrowers are not willing to bear joint liability due to the acute problem of migration. Therefore, urban MFIs that offer individual loans are extra-cautious about minimising default risk. This article studies whether MFIs consider ownership of a room in a slum as a hidden selection criterion in a loan programme. Room ownership indicates stability in a particular location, and also indicates the income-generation capability of an aspirant borrower. We use a primary survey database collected from a non-governmental organisation, Navnirman Samaj Vikas Kendra, which provides micro-credit in four slums of north Mumbai in India. We find that the probability of getting selected in a micro-credit programme is significantly higher if a loan applicant owns a room than if the applicant lives in a rented room. MFIs appear to be more concerned about shielding themselves from default than fulfilling the broad goal of maximising social welfare by reaching the poorest of the poor. We present our study with the caveat that the results may not be generalisable, since they are based on a case study. JEL Classification: D78, G20, G21

Keywords: Micro-finance; Creditworthiness; Financial Sustainability; Urban Slums (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:8:y:2014:i:1:p:59-75

DOI: 10.1177/0973801013506401

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