Peer Influence and Microfinance Loan Defaults under Crisis Conditions: Evidence from Indian Demonetization

48 Pages Posted: 15 Feb 2019 Last revised: 17 Nov 2022

See all articles by Arzi Adbi

Arzi Adbi

National University of Singapore

Matthew Lee

Harvard Kennedy School of Government

Jasjit Singh

INSEAD; INSEAD

Date Written: November 17, 2022

Abstract

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

Suggested Citation

Adbi, Arzi and Lee, Matthew and Singh, Jasjit and Singh, Jasjit, Peer Influence and Microfinance Loan Defaults under Crisis Conditions: Evidence from Indian Demonetization (November 17, 2022). INSEAD Working Paper No. 2022/54/STR, NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3334887 or http://dx.doi.org/10.2139/ssrn.3334887

Arzi Adbi

National University of Singapore ( email )

15 Kent Ridge Drive
Mochtar Riady Building
Singapore, Singapore 119245
Singapore

Matthew Lee

Harvard Kennedy School of Government ( email )

111 Western Avenue 10 soldiers Field park apartmen
Boston, MA 02163
United States

Jasjit Singh (Contact Author)

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore
+65 67995341 (Phone)

HOME PAGE: http://faculty.insead.edu/singhj/

INSEAD ( email )

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