Resilience of the Group Lending Model to a COVID-19 Induced Shock: Evidence from an Indian Microfinance Fund
Abstract
We study the effect of an exogenous shock in the form of Coronavirus lock-downs on individual default, and on default contagion within the microfinance (MF) sector in India. We rely on proprietary data obtained from a MF institution for the period from Nov 2019 to Dec 2020. We show that default increased to 95.29% in the month of April 2020 when Covid lockdowns were fully in place. However, borrowers bounced back almost immediately thereafter, either making full or partial payments, so that defaults had fallen to 5.92% by December 2020. We show that the group lending model helped blunt the impact of the exogenous covid shock on rates of default among the majority (92%) of borrowers who are residents of rural districts. In results new to the MF literature, we show an absence of contagion from groups in villages with the highest defaults to other groups in the same district as the distressed village. We conclude that MF sector can absorb exogenous shocks like the pandemic to continue to provide poverty alleviation during difficult times.
