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The Credit-worthiness of a borrower and the selection process in Micro-finance: A case study from the urban slums of India

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  • Paul, Sohini

Abstract

This paper examines whether urban Micro-Finance Institutions (MFIs) consider proxy/ hidden collateral in the absence of physical as well as social collateral to judge the creditworthiness of a borrower. Micro-finance institutes operating in urban slums adopt an individual lending mechanism in several cases since borrowers are not willing to bear joint liability due to the acute problem of migration. Therefore, such urban MFIs that offer individual loans become extra-cautious to minimise default risk. To be specific, we study whether an MFI considers ownership of a 10ftx10ft room in a slum as a hidden selection criterion in a loan programme. Room ownership, on the one hand, indicates stability in a particular location, but on the other hand, it infers income generation capability of an aspirant borrower. We use a primary survey database collected from an NGO, Navnirman Samaj Vikas Kendra that provides micro credit in four slums of north Mumbai in India. We find that the probability of getting selected in a micro credit programme becomes significantly higher if a loan applicant owns a room in a slum compared to one who 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 generalizable, since they are based on a case study.

Suggested Citation

  • Paul, Sohini, 2013. "The Credit-worthiness of a borrower and the selection process in Micro-finance: A case study from the urban slums of India," MPRA Paper 48116, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:48116
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    File URL: https://mpra.ub.uni-muenchen.de/48116/1/MPRA_paper_48116.pdf
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    References listed on IDEAS

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    1. Kono, Hisaki, 2006. "Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates?: Evidence from Field Experiments in Vietnam," IDE Discussion Papers 61, Institute of Developing Economies, Japan External Trade Organization(JETRO).
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    More about this item

    Keywords

    Micro-finance; Credit-worthiness; Financial Sustainability; Urban slums;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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