The dynamics of competition in the Indian microfinance sector

With the phenomenal growth of the Indian microfinance sector over the past decade, microfinance institutions (MFIs) increasingly find themselves competing for the same customers. Competition may lead to lower interest rates, better designed products, and better customer service as more innovative and efficient MFIs are rewarded and less efficient ones driven out of business. Yet, it may also have an adverse effect on overall repayment rates if MFIs’ threats to withhold future loans in the case of default no longer act as a disincentive for customers with multiple borrowing options.

Despite the growing importance of competition in Indian microfinance, there is little awareness of the extent to which competition plays a role in the actual functioning of microfinance on the ground. Through the use of a newly available dataset, this project seeks to estimate how many microfinance clients in one state of India are borrowing from more than one MFI at a time. The results of this work may help policy makers to gauge the need for a credit bureau in the Indian microfinance sector.

Download the working paper

Click here for press coverage from The Economic Times

Click here for a short version of the study published in the fourth issue of Microfinance Insight magazine, published by Intellecap.

THIS PROJECT IS CURRENTLY ON HOLD