Centres Of Excellence

To focus on new and emerging areas of research and education, Centres of Excellence have been established within the Institute. These ‘virtual' centres draw on resources from its stakeholders, and interact with them to enhance core competencies

Read More >>

Faculty

Faculty members at IIMB generate knowledge through cutting-edge research in all functional areas of management that would benefit public and private sector companies, and government and society in general.

Read More >>

IIMB Management Review

Journal of Indian Institute of Management Bangalore

IIM Bangalore offers Degree-Granting Programmes, a Diploma Programme, Certificate Programmes and Executive Education Programmes and specialised courses in areas such as entrepreneurship and public policy.

Read More >>

About IIMB

The Indian Institute of Management Bangalore (IIMB) believes in building leaders through holistic, transformative and innovative education

Read More >>

INFLEXIBLE MICROCREDIT CONTRACTS AND THEIR DISCONTENTS: A THEORETICAL PERSPECTIVE BASED ON CONSUMER PSYCHOLOGY INFLEXIBLE MICROCREDIT CONTRACTS AND THEIR DISCONTENTS: A THEORETICAL PERSPECTIVE BASED ON CONSUMER PSYCHOLOGY

Typical microcredit contracts offered by microfinance institutions to their impoverished customers are inflexible. These contracts necessitate the poor to honour frequent periodic repayments without providing them the option to reschedule the same as necessitated by emerging contingencies. Such inflexibilities engender financial stress resulting in decision-biases (Fehr, 2014), and severely curtail autonomy leading to detrimental economic and psychological consequences. This paper addresses these issues by assessing and challenging the supply-side considerations that guide most microfinance institutions in offering such rigid contracts, based primarily on the tenets of consumer psychology.  In doing so, the broader call for conducting research on poverty from the perspective of consumer psychology is addressed. 

Specifically, flexibility in rescheduling repayments can not only free up much needed cognitive resources necessary for thinking clearly about the future, but also act as a psychological insurance in keeping the debilitating effects of financial stress in abeyance, thereby improving decision-making. Further, investment specific loans involving repayment schedules matched with the cash flow typical of associated investments, can reduce financial stress by redirecting consumers’ attention, away from servicing the loan, towards making psychologically unconstrained use of the borrowed capital. 

This paper contributes to the academia by integrating theoretical tenets from cognitive neuroscience, cognitive psychology, mental accounting theory, and the self-determination theory. Further, the paper contributes to practice by suggesting flexible loan structures, and investment specific loans, that can potentially ameliorate the detrimental psychological ramifications of inflexible loan structures. Finally, the paper contributes to public policy by highlighting ways flexible or investment specific loans can help in achieving two very important objectives of poverty alleviation, simultaneously: economic welfare of the poor, and their psychological well-being. Concomitant changes required in implementing these alternative microcredit contracts, thus suggested, are also discussed in this paper.