A For-Profit Model of Microcredit

Can Profit-Driven Firms Improve Financial Inclusion in India?

Abstract

Microcredit is a proven means of poverty alleviation. However, its implementation in India is flawed. High interest rates, incompetent use of credit, and insufficient loan-sizes are just some of the problems well-documented in literature. This paper seeks to assess if these problems can be alleviated by a for-profit model of microcredit, and hence if this model can sustainably improve financial inclusion in India. The role of profit-motives in Indian microcredit has only been analyzed from a theoretical perspective thus far, so this paper adds to existing research by bringing in an empirical perspective through data from Microfinance Institutions from the MIX Markets database.  A baseline binary Logistic Classifier is trained, alongside proposed models of a Decision Tree Classifier and a Gradient-boosted Tree Classifier. Feature analysis is conducted on the models, and the results are used to devise profit-maximizing strategies. These strategies are then analyzed to assess if profit-driven companies can improve financial inclusion in a socially desirable manner. The study finds that for-profit incentives can increase the spread, efficiency, and accessibility of microcredit while potentially fostering competent use of credit and reducing the cost of borrowing. However, the study also notes the requirement for regulation in the growth and means of enforcing repayment in such for-profit models. Further, the study observes that a for-profit model may increase credit risk and will fail to allocate credit to the lowest strata of the poor. As such, for-profit firms must be complemented by not-for-profit MFIs to improve financial inclusion across the board.