This study reveals that while Microfinance Institutions (MFIs) in India implement various credit risk-mitigation strategies, these measures, such as increased risk coverage and loan impairment provisions, may inadvertently lead to a mission drift, compromising their social goal of supporting low-income borrowers and potentially excluding them from access to credit.
Authors
Rajeev Kumar Revulagadda, Department: Finance & amp; Economics, Indian Institute of Management (IIM) Mumbai, (Under Ministry of Education, Government of India), Vihar Lake, Mumbai, 400087, India
K. S. Ranjani, Department: Finance & amp; Economics, Indian Institute of Management (IIM) Mumbai, (Under Ministry of Education, Government of India), Vihar Lake, Mumbai, 400087, India
Sanjeev Kumar, Associate Professor, Jindal Global Business School, O.P. Jindal Global University, Sonipat, Haryana, India
Summary
Microfinance Institutions (MFIs) manage credit risk in order to control the default rate, with an emphasis on developing a self-sustaining enterprise. The mitigation of credit risk has been regarded as a central aspect of establishing a financially viable enterprise. MFIs employ diverse risk-mitigation practices at different stages, beginning with borrower screening and continuing through group formation, lending, and repayment collection. However, robust risk-mitigation practices should not result in the exclusion of low-income borrowers.
We used the Mix Market database to collect information on Indian MFIs in order to investigate whether the MFIs credit risk-mitigation strategies are contributing to the exclusion of low-income borrowers. The credit risk-mitigation measures, including portfolio at risk, group lending, loans lent to women, write-off ratio, risk coverage ratio, provision for loan impairments are used to determine the impact, if any, on the average loan size. Our panel study on Indian MFIs using GMM (generalised method of moments) approach demonstrates that the increase in credit risk measures, such as risk coverage ratio and provision for loan impairment, has a positive impact on the mission drift measure, which indicates that the MFIs financial objective is eroding its social goal.
Published in: Journal of Social and Economic Development
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