When Collateral Is a Livelihood: Sustaining Access to Productive Assets

Abstract

Asset-backed lending unlocks vital credit for underserved borrowers by using the financed asset as sole collateral. Yet, scaling this model remains exceptionally difficult. Lenders must balance low loan values and rapidly depreciating assets against volatile repayment behavior, making it hard to distinguish temporary distress from true default. Furthermore, enforcement actions to redeploy these assets can carry substantial economic and social costs. We address these scaling frictions using data from a large Indian commercial electric vehicle lender serving self-employed workers and small businesses. We formulate the lender decisions as a budgeted restless bandit problem and develop a tractable dual-based priority policy that ranks accounts by the value of immediate enforcement versus continued engagement. We prove global convergence to a unique steady state under a simple verifiable condition and establish asymptotic optimality as the portfolio scales. We also show that the resulting dual-priority policy is interpretable, computationally simple, and exhibits monotone structure under realistic conditions. In observational data, our policy improves on the firm’s current strategy by 1.5% even under highly conservative evaluation assumptions. Empirically, our dual-priority policy outperforms industry benchmarks by more than 15%, and has the lowest false-positive rates as it rarely enforces against borrowers who would have eventually repaid. These gains are driven by earlier enforcement when recovery is unlikely and by greater flexibility for first-time asset buyers and individual microbusinesses.

Keywords: Sustainable operations, Emerging markets, Dynamic resource allocation, Financial inclusion