In order to control over-indebtedness that often leads to capacity failure, the Reserve Bank of India recently issued directives for Micro Finance Institutions to restrict multiple loans to borrowers. These institutions are also required to regularly share their current borrowers’ loan records with a Credit Information Company. We argue here that ex-post loan record verification is inefficient and inadequate considering the socio-economic and informational asymmetries in micro-credit markets. Instead, we reason, household characteristics can predict multiple-borrowing behaviour. Our empirical analysis shows that this is true to some extent. We dwell on policy implications and ways to improve our model.
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