Microfinance Loan Default: Evidence from Indian Microfinance Institutions

The number of microfinance institutions (MFIs) entering the microfinance sector increasing gradually, leading to the cutting of corners in matters of consumer protection – multiple lending, over-indebtedness, and consequently coercive collection practices. Because of these practices, defaults in microfinance loans have been increased significantly in the last decade. This research paper has studied the causes of default of microfinance loan by the adoption of cross-sectional descriptive research design. For primary data collection, a structured questionnaire was formed with thirty-seven questions. For selecting samples, cluster sampling was used initially and had taken Gujarat state as one of the clusters. Next, MFIs were selected from this cluster with certain criteria and then microfinance loan defaulters of these MFIs were chosen for the survey. A total of four hundred and sixty-three microfinance loan defaulters of MFIs were surveyed. Next, the paper evaluates the combination of different variables that could have led to loan default through cross-tabulation Next, the paper has studied the association of borrower’s factors with causes of default and the loan amount to understand different characteristics that lead to a specific cause of default. Lastly, to identify the variables considered for deciding the loan amount. The frequency analysis showed that the major cause of default was another debt which highlighted the situation of multiple lending where different MFIs lends to the same borrower. The results of cross-tabulation and hypotheses tests show that MFIs were not considering demographic and economic factors of the borrower while deciding the loan amount and rather it was related majorly to the number of borrowing cycles. By analyzing the results of the study, the paper identifies preventive measures to control microfinance loan defaults.