Factors influencing the borrower loan size in microfinance group lending: a survey from Indian microfinance institutions

Abstract

Purpose The purpose of this paper is to analyze the impact of the cost of microfinance intermediation on borrowers’ loan size. The identified transaction cost and credit risk factors tell about what a lender takes into accounts while screening and allocating loan amounts to the borrowers, where the lender has limited information about the client’s ability to repay. Design/methodology/approach The analysis is based on the primary data collected from a sample of 498 microfinance institutions (MFI) linked group clients covering two microfinance leading states of India. Findings Empirical findings suggest that the cost of microfinance intermediation has an impact on borrowers’ loan size. To reduce the cost, the MFIs lend big loans to clients having a high income, assets, land size, lower informal borrowings and having longer loan experiences. In MFI lending, the younger and less educated people are the ones who demand bigger loan amounts. The geographical distance of borrowers’ location from MFI offices, group size and interest rate are the other factors that influence the loan size. Originality/value The past empirical works seem to have not focused on how the cost of microfinance intermediation creates loan size variation among the borrowers in joint liability group lending. The endogeneity problem has not been resolved. The present article thus identifies the factors that influence the individual member loan size by using two-stage least squared regression to tackle the issue of endogeneity.

Examining mission drift in client targeting among Indian for‐profit microfinance institutions: A multidimensional approach

“…The larger lending can be a result of higher creditworthiness among richer households, as perceived by MFIs. Contrarily, the default risks are perceived higher if the clients are poor (Sangwan & Nayak, 2020b).…”

“…It suggests that with time the borrowers tend to develop a long-term credit relationship with lenders. Besides, the borrowers showing good loan repayment records are more likely to gain the confidence of the lenders, and then the lenders tend to provide bigger loan amounts at concessional interest rates (Sangwan & Nayak, 2020b). The subsequent microcredits to these clients may facilitate them to move progressively onto more productive activities and hence, they tend to demand larger loan amounts.…”

“…The larger lending can be a result of higher creditworthiness among richer households, as perceived by MFIs. Contrarily, the default risks are perceived higher if the clients are poor (Sangwan & Nayak, 2020b). Taking the usage perspective, one can argue that the wealthier clients are expected to utilize the credit amount more effectively, while the poor clients are inclined toward contingency spending like medical emergencies, school fees, cross‐financing loans, marriage, and so on, which may deter their repayment abilities (Dutta & Banerjee, 2018).…”

“…They are concerned about obtaining a bigger loan size but are hardly worried about the cost of borrowing. Contrarily, the more educated clients prefer financial services from other formal institutions (Sangwan & Nayak, 2020b). Further, they exhibit greater abilities to assimilate the information and hence, improve their business decisions making (Muhammad et al, 2020).…”

“…On the other side, serving the high‐income clients involves low transaction costs and hence, the interest rate remains low encouraging them to borrow larger amounts. In MFI lending, higher interest rates are channeled to borrowers either in terms of bigger installment size or longer loan tenure (Sangwan & Nayak, 2020b). In such cases, borrowers perceive high indebtedness.…”