Deliberations on Borrower Behaviour in the Context of Micro-finance
Micro-finance, a popular tool for poverty alleviation, has witnessed a cycle of reaching out to the credit strapped, recording high recovery rates, scaling up exponentially and facing mass defaults, world-over. The two states of AP and Telangana are no exception, with Micro Finance Institutions (MFIs) scaling-up and borrowers defaulting on MFI loans en-masse, following the state intervention to stop usury. Following the losses incurred to MFIs, the second-largest micro-lending channels, AP and Telangana experienced credit vacuum, leaving the borrowers to exploitation by informal lenders. While the MFI-promoted Joint Liability Groups (JLGs) failed, the state run Self Help Groups (SHGs) performed sustainably, prompting the present research to investigate borrower behaviour through the following research aims -understanding the drivers for borrower behaviour, understanding the credit management and securitization by borrowers and understanding the role of gender in borrowing behaviour. The research was conducted through face-to-face interviews of 839 borrowers in the four districts of Adilabad, Srikakulam, Chittoor and Nalgonda, covering famers, off-farm workers, farm labourers and women. The districts were chosen to represent a credit-led environment, credit-scarce environment and an environment of moderate credit supply, based on the number of SHGs operating, the number of bank branches in the vicinity and the volume of credit lending by SHGs. Literature on borrowing has been streamlined into that dwelling on outreach issues, with a focus on the poor, and where credit disbursal is a means and institutional building is an end. This thesis terms this school of literature as the outreach school. Another stream of literature on micro-finance dwells on mature borrowers’ repayment strategies in the event of competition between lenders, and lenders, in turn, losing poverty focus in an effort to earn profits; and are simultaneously warned against strategic defaults for maintaining sustainability in lending. This thesis terms this school as sustainability school. This thesis further identifies the focus of these two schools of literature and blends the two arguments in understanding borrowing behaviour. Borrowing behaviour has been viewed either from the lens of structural constraints to credit access, and the consequences on borrower livelihoods, termed as the outreach school; or from the strategic perspective, where borrowers in a credit-flush environment plan their borrowings v and defaults strategically, termed the sustainability school. This thesis argues that borrowing is neither a consequence of credit constraint, nor an outcome of plentiful borrowing opportunities, but rather is a combination of both, moderated by personal effects. The borrowing environments are chosen to represent credit surplus, credit scarcity and moderate credit supply, and consequently we find borrowing behaviour an outcome of interplay between structure and strategy. Furthermore, literature links borrowing behaviour to relative wealth; and we examine the impact of personal effects on borrowing. We explain the continuum of borrowing, starting from borrowers’ credit preference, purpose of borrowing, the actual borrowing, securitization and repayment behaviour through the predictor variables emerging out of sustainability school, which we term strategy, and the outreach school of literature, which we identify as structure, and personal effects of borrowers. Furthermore, we identify gender as a crucial driver for borrowing behaviour and identify the gender-based differences in borrowing, repayment and spending of micro-loans; and model the interrelationship between intra-household dynamics and credit group dynamics, and women’s empowerment. Using multivariate techniques like regression and Structural Equation Modelling (SEM), this thesis observes the borrowing process, credit management through loan securitization, the process of repayment and the event of default, and finally, the role of gender in borrowing and default behaviour.