Hidden Costs in Microcredit
|Speaker:||Pradeep Kumar, University of Exeter|
|Date: ||Wednesday 21 November 2018|
|Location: ||Matrix Lecture Theatre, Building One|
Abstract: One of the main problems solved by microfinance is a reduction in the cost of providing credit as compared to the traditional banks. In this paper, we explore two factors which affect the cost of providing micro-credit but have not been studied before: contract type of a bank field agent and delay in repayments. Using a rich data from a large microfinance bank in India, we compare a change in the productivity of a bank agent when her contract type is changed from a pure commission based to a mixed contract (flat+commission). We find that pure commission agents not only disburse fewer loans but also acquire more risky borrowers. Although default rates are very low (<2%) as commonly reported for microfinance, we find that borrower delays are significant and widespread in the loan portfolio. We construct a measure of delinquencies and estimate that the bank is losing an effective interest rate of 2.3% at the minimum because of the delays in repayments. Using a finite mixture model, we also find that pure commission agents have 1.5% more delays than the mixed contract agents for riskier borrowers.