Can behavioral biases improve the financial capability of microfinance clients in the tribal states of India?

• DOI: http://doi.org/10.1002/jsc.2367
• Published date: 01 September 2020
• Date: 01 September 2020
• Author: Mani Chidambaranathan,Samapti Guha

RESEARCH ARTICLE

Can behavioral biases improve the financial capability of

microfinance clients in the tribal states of India?

Mani Chidambaranathan | Samapti Guha

Centre for Social Entrepreneurship, School of

Management and Labour Studies, Tata

Institute of Social Sciences (TISS), Mumbai,

India

Correspondence

Samapti Guha and Mani Chidambaranathan,

Centre for Social Entrepreneurship, School of

Management and Labour Studies, Tata

Institute of Social Sciences (TISS), Naorojee

Campus, V.N. Purav Marg, Deonar, Mumbai

400088, India.

Email: samapti@tiss.edu (S.G.) and chidam65@

gmail.com (M.C.)

Abstract

Financial capability (FC) of the households involved in microfinance (MF) activities is

better than those who are not. MF model, especially the traditional informal group

structure, provides a platform for financial socialization and hence, it enables to build

the FC of its members. Socioeconomic factors and behavioral economic variables sig-

nificantly influence the level of FC of the households involved in MF activities. While

designing FC enhancement programs, one should consider social capital structures

and behavioral economic aspects.

KEYWORDS

behavioral biases, financial capability, microfinance, indigenous households, financial inclusion

1|INTRODUCTION

Over a decade, India has been giving importance to financial inclusion

(FI) of the households by ensuring that they avail secured savings, credit,

products, and payment services through the formal financial institutions

(PMJDY-GOI, 2014; Rangarajan, 2008; Reserve Bank of India

[RBI], 2019). It is expected that such interventions would help these

households to improve their income, acquire capital, manage risk, and

work their way out of poverty (RBI, 2019). Though several efforts by the

government and the banking institutions brought many of the unbanked

households to the banking network, the target of the real usage of finan-

cial services, especially credit from the banks that help these households

to move out of poverty, is not achieved (Bhanot, Bapat, & Bera, 2012;

RBI, 2019; Sophia, 2014; Thangasamy, 2014). To bridge this gap,

microfinance (MF) models emerged formally (registered MF organiza-

tions) and informally (community-based savings and credit organizations)

to help households access financial products to meet their day -to-day

needs or even to create small assets (Kelkar, 2008; Parekh &

Ashta, 2018). However, the reach of formal microfinance institutions

(MFIs) to remote areas like northeastern (NE) states is restricted

(Kshetrimayum, 2012). Therefore, mostly in these regions, the informal

MF groups act as alternatives for meeting the credit needs of the house-

holds (Kshetrimayum, 2012; Sophia, 2014).

Many households still access credit from individual moneylenders

even if it is at a high cost, to avoid nonprice barriers (such as attending

group meetings and making standardized loan repayment) (National

Sample Survey Organisation [NSSO], 2014; Parekh & Ashta, 2018;

Ramadorai, 2017). Their exclusion from formal banking and formal MF

systems is not only due to the remoteness of their localities and the

hilly terrain which makes accessing these services more challenging

but also due to the lack of financial capability (FC) of the households

in terms of knowledge about such programs, attitudes toward joining

those programs, and poor management of their money and resources

(Blake & de Jong, 2008; Shankar, 2015). In technical terms, FCs are

the abilities of a person or a household to act, that is converting their

internal abilities (in the form of assets, goods, income, education,

knowledge, skills, and attitude) and external resources (such as physi-

cal infrastructures like financial institutions) into financial behavior

(actions). Such capabilities include accessing and managing their finan-

cial resources to meet the desired level of financial well-being

(Bickel & Mehwald, 2014; Perotti, Zottel, Iarossi, & Bolaji-Adio, 2013;

Sherraden, 2013). These studies have recognized that enhancing FC

of the individuals and households can enable them to have a better

chance to access financial services from financial institutions. In the

community-based MF models, people organize themselves as social

capital, which provides a platform for them to learn to handle money

and other resources, and use the money that they borrow for meeting

their basic needs (Cabraal, 2010). The author found that such social

capital can help to build their FC. However, with increasingly complex

JEL classification codes: C01, C12, C83, D91, G21, G51, G53.

DOI: 10.1002/jsc.2367

Strategic Change. 2020;29:589–606. wileyonlinelibrary.com/journal/jsc © 2020 John Wiley & Sons Ltd 589

financial lives of people and the financial products and services, the

enhancement of FC calls for more formal financial education interven-

tions like classroom-based sessions, workshops, and financial literacy

camps (OECD, 2013; RBI, 2019; Sherraden, 2013).

The results of these efforts are a mix, as such programs do not con-

sider other factors including behavioral biases that influence the FC level

of the individuals of the households (Antón-Díaz, 2018; de Meza,

Irlenbusch, & Reyniers, 2008; Dixon, 2006; Spencer, Nieboer, &

Elliott, 2015). Before checking the relationship of behavioral biases and

FC, it is necessary to understand the level of FC of the households

involved in MF activities. However, no studies are measuring the FC of

these households in the remote tribal region like NE states in India. The

empirical research conducted with the indigenous and nonindigenous

households in the NE region focuses on the measurement of FC of the

households associated with MF organizations (MFOs), both formal (self-

help groups [SHGs]/joint liability groups [JLGs]) and informal MF associa-

tions, and check whether their FC level is influenced by behavioral biases

along with other socioeconomic factors. Such findings will emphasize the

need for considering the behavioral aspects in the policy and program

design of FC and FI improvement efforts.

2|LITERATURE REVIEW AND

HYPOTHESIS

Literature review of the previous studies on FI, MF, FC, and behav-

ioral economic aspects provides the background for the hypothesis to

be examined.

2.1 |FI, MF, and FC

Enabling low-income households to move out of poverty through FI is

not a new phenomenon in India. It was started in 1904 when credit

cooperatives were established and later in 1975 with the introduction of

regional rural banks (RRBs) to offer cheaper credit to low-income and

weaker sections of the households (Kelkar, 2008). Besides, the National

Bank for Agriculture and Rural Development (NABARD) was established

in 1982 to meet the agriculture credit needs (RBI, 2008). However,

meeting the credit needs of low-income groups by the banking sector

was a challenge. Around 1992, NABARD launched the SHG bank linkage

program to reach out to the more rural households through microcredit

for meeting all purposes, including consumptions needs (RBI, 2008).

Moreover, to bridge the credit gap, many nongovernmental organizations

(NGOs) and private financial institutions (MFIs) have adopted MF models

through JLGs and SHGs (Kelkar, 2008; Mader, 2013; Parekh &

Ashta, 2018). However, low-income groups accessing their entire credit

demand from these formalized models has been low. The national house-

hold survey in 2003 revealed that only 27% of the households were

indebted to formal sources (NSSO, 2006). Low-income households claim

that accessing credit from formal sources is too expensive (Milana &

Ashta, 2020). Therefore, they continue to access credit from informal

moneylenders for their consumption needs as, here, the process of

accessing credit is more straightforward and does not involve nonprice

barriers and transaction costs (Parekh & Ashta, 2018). The committee,

chaired by Rangarajan (2008), outlined several strategies to ensure that

they are financially included. For a decade, the country has been engaged

with rigorous FI interventions

1

and has made a large number of individ-

uals of the households financially included by encouraging them to have

a bank account (RBI, 2019). The increase of individuals having a bank

account was possible through opening an increased number of bank bra-

nches. As the government made payments to beneficiaries through bank

accounts, many accessed their bank accounts to receive such payments

(RBI, 2019). Around 200 MFIs established more than 14,000 branches

across 29 states/Union Territories and reached out to more than 35 mil-

lion clients with an outstanding loan of Rs. 68,789 crores (USD 9,625

million) as of March 2018 (Sa-Dhan, 2018).

Though both the banking sector and the MFIs have tried to meet

the credit demand of the excluded households, neither have reached the

remotest regions of the mainland like the NE and islands like the

Andaman and the Nicobar (Sa-Dhan, 2018; Thangasamy, 2014). Not

many MFIs operate in states like Manipur (7 MFIs) and Tripura (11 MFIs),

and their branches are located close to the state capitals (Sa-Dhan, 2018).

The traditional community-based groups like Marup (which means

“friendship group”in Manipuri—a group of friends, relatives, and neigh-

bors come together as a group to get access to social and financial needs

(Kshetrimayum, 2012; Sophia, 2014) and Church-based women's socie-

ties are the typical local MF associations operating in Manipur. In Tripura,

Bandhan MFI (now operating as a bank) is the known MFI that offers

financial services in the nontribal region through JLGs. High financial

exclusion is also attributed to a lack of FC (Bickel & Mehwald, 2014;

Blake & de Jong, 2008; Shankar, 2015). These researchers recognize that

FC enhancement is an essential enabler for advancing FI. However, so

far, little has been done to enhance the FC of households in India

(Venkatesan, 2016). The issues lie in conceptualization and strategies to

enhance FC as discussed in the next section.

2.2 |Conceptual model of FC

The World Bank defines FC as “the internal capacity to act in one's best

financial interest, given the socioeconomic and environmental conditions. It

encompasses the knowledge, attitudes, skills, and behaviours of cons umers

about managing their resources and understanding, selecting and making

use of financial services that fit their needs”(Perotti et al., 2013. p. 7).

In the Indian context, Bickel and Mehwald (2014, p. 13) have defined

“capability as the ability to act, and financial capability as the ensemble of

abilities related to making informed financial choices, managing money

effectively, and using financial services for one's benefit.”The ability to

act is shaped by personal attributes such as knowledge, skills, and atti-

tudes, as well as physical, social, cultural, and economic assets.

The consensus on the conceptualization of FC (Accion, 2013;

OECD, 2013; Sherraden, 2013) is that FC enhancement starts by pro-

viding financial education. Financial education leads to financial

knowledge and skills creation, changes in financial attitude, and a

change toward healthy financial behavior, which includes money

590 CHIDAMBARANATHAN AND GUHA