Borrower Evaluation in the Informal Credit Markets
Hari Srinivas
The informal Credit Markets contain different types of suppliers....what constitutes the criteria that they use to evaluate the credit worthiness of a borrower? Research shows that some or all of the following criteria is used for evaluation.
- Past repayment Record
- Prompt repayment of previous loans remains the single most important criteria for a borrower to enhance his or her credit worthiness with the ICM supplier. Frequent changes in the terms and conditions of the loan agreement (for example, a delay in repayment or renegotiation of interest rates) would similarly affect credit worthiness.
- Social Status
- The social staus of the borrower, such as his place of origin, language spoken, and religion (in multi-cultural countries such as India), play an important role. Place of origin is important when we rialize that most low-income families in urban areas are first, second or third generation migrants, and original social ties continue to influence social status.
- Acquaintance
- The length of acquaintance (in terms of number of years) and the type (family or business friend) are defining factors. Timberg (1984) cite the case of a money lender in India who lent only to borrowers who had transacted with his father, or their sons.
- Employment Status
- As with the formal sector, employment status (income, type and place of work) is used as a criteria to evaluate borrowers. Place of work is tied up with the fact that most families stay in settlements close to the place of work (or vice versa), and "keeping an eye" on the borrower becomes easy for the supplier, and ensures repayment.
- Recommendation
- A person having a good relationship with an ICM supplier, such as a settlement leader, a shop keeper may make a recommendation on behalf of the borrower for a loan. This is different from a guarantee, in that it does not involve any financial committment on the part of the recommender
- Collateral
- Most suppliers do not need collateral, as risk aversion is ensured by other means, such as close informational ties. But there are exceptions: some money lenders require collateral for exceptionally large loans; certain people's organization (or self-help groups) provide loans to its members only when they have saved a predetermined amount as "collateral"; pawn brokers demand collateral as an intrinsic part of their operations.
- Guarantee
- As with formal loans, thrid party guarantees are also seen in the ICM to ensure repayment, particularly for large loans.
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Hari Srinivas - hsrinivas@gdrc.org
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