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In considering the unique challenges that base-of-pyramid (BOP) customers face, management literature has often highlighted the issue of purchasing power but has not paid as much attention to liquidity constraints. Using India’s 2016 demonetization as a natural quasi-experiment, we study how a liquidity shock affected loan repayment by microfinance customers. Our analysis reveals that the likelihood of missed loan payment went up drastically post-demonetization, especially for the poorest customers. Further, the repayment decisions of customers from a given location were not independent: the proportion of locations where all customers simultaneously missed payments increased from 1.3% pre-demonetization to 21.6% post-demonetization. Finally, the likelihood of such collective missed payment behavior was higher in centers that were either election-bound or had significant borrower base from minority religions.
Adbi et al. (Thu,) studied this question.