Published on: 2014-11-26
In this Academic Seminar, Sujata Visaria, Assistant Professor at the HKUST Department of Economics, presented her and her collaborators’ research on micro-credit schemes in India at the HKUST IEMS Academic Seminar on 8 December 2014. The main theme of the seminar revolved around traditional vs. non-traditional micro-credit delivery schemes in India, and specifically around Dr. Visaria’s field experiments on an alternative delivery method which resulted in significant boosts to the incomes of the rural poor.
Contrary to traditional micro-credit schemes (called group based loans, aka GBL) which have been proven to have little-to-no effect on increasing borrower incomes, Dr. Visaria’s experiment focused on an alternative micro-credit scheme (called trader-agent intermediated lending, aka TRAIL) which delegates borrower selection to local trader-lender agents incentivized by repayment-based commissions, and modifies traditional micro-loan structures in order to better match crop cycles, introduce individual-liability rather than joint-liability rewards and punishments, increase loan durations, allow for single lump sum repayments, and include built-in crop insurance.
While traditional forms of micro-credit are fiscally untenable absent government subsidized loans to micro-lending institutions, Dr. Visaria sees great potential in TRIAL-based micro-lending as the most profitable micro-credit scheme yet tested for both borrower and lender alike.
Recent evaluations of traditional microfinance loans have found no significant impacts on borrower incomes or productive activities. We examine whether this can be remedied by (a) modifying loan features to facilitate financing of working capital needs of farmers, and (b) delegating selection of borrowers for individual liability loans to local trader-lender agents incentivized by repayment-based commissions. We conduct a field experiment in West Bengal where this design (called TRAIL) was offered in randomly selected villages. In remaining villages a more traditional design (called GBL) was offered, wherein five-member groups applied for joint liability loans with terms otherwise similar to TRAIL loans. TRAIL loans increased cultivation of potatoes (the major cash crop in the region) and farm incomes by 17–21%, whereas GBL loans had insignificant and highly dispersed effects. We argue this was because TRAIL agents selected borrowers that were low-risk and highly productive, whereas the GBL scheme attracted farmers that were riskier on average and highly heterogeneous in terms of productivity. TRAIL loans also achieved higher repayment and take-up rates, and lower administrative costs.
About the Speaker
Sujata Visaria is Assistant Professor in the Department of Economics at the Hong Kong University of Science and Technology. She has a Ph.D. from Columbia University, and worked at Boston University for four years before coming to HKUST. Her research studies how financial institutions affect micro-level outcomes in developing countries. She has published in the American Economic Journal: Applied Economics, American Economic Review and Econometrica. She is an affiliate of the Bureau for the Research and Economic Analysis of Development (BREAD) and the Small and Medium Enterprise Initiative of Innovations for Poverty Action.
[Presentation Materials] Slides presented at the seminar
[Thought Leadership Brief] Helping Microfinance Fulfill its Promise: Raising Borrower Incomes through Agent-Intermediated Lending