Positive Assortative Matching and Default Rates in Microfinance Institutions of India

This chapter tests the popular idea that in a microfinance contract, institutional governance through positive assortative matching among the borrowers makes the group more stable and reduces the likelihood of default. To test the hypothesis, primary data collected from two semi-urban areas belonging to the state of West Bengal, India, catered by more than a dozen microfinance institutions (MFIs) each is used. The study controls for three social parameters such as age and education level of the borrower as well as the gender of their household head. It is found that, in MFI groups, borrowers belonging to identical age brackets show significantly lower default rates, likely reflecting their willingness to bail each other out during financial crises. However, with respect to education and gender of the head of the household, the coefficients appear to be insignificant. It can be argued that since the education level and the family structure of borrowers across the sample are almost identical, the impact of education and family structure on default rates cannot be explained properly.