Peer Influence and Microfinance Loan Defaults under Crisis Conditions: Evidence from Indian Demonetization
48 Pages Posted: 15 Feb 2019 Last revised: 17 Nov 2022
Date Written: November 17, 2022
The microfinance group lending model has been widely adopted as a strategy for financial inclusion. However, we argue that under crisis conditions where risk of individual loan defaults is already high, this approach contains a vulnerability: borrower-to-borrower connections within lending communities created to promote repayment can facilitate the spread of defaults. We test our arguments in the context of the liquidity crisis that followed India’s 2016 demonetization policy. Using proprietary data on the repayment decisions of about two million microfinance borrowers, we document disproportionate localization of post-demonetization defaults within lending communities. We also find evidence consistent with borrower-to-borrower spread of defaults not only through formal joint liability connections, but through informal social connections, with the latter influence being stronger between borrowers from the same religion.
Keywords: Peer Influence, Group Lending, Microfinance, Loan Defaults, Demonetization
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