Don’t Stay Put : Ride the (Credit) Wave

Information asymmetries and enforcement problems often limit commercial lenders’ entry into low-income markets. Using credit registry data, we study the “failed” entry of commercial lenders into a low-income, low-documentation microfinance market, which led to an over-indebtedness crisis. Leveraging features of the institutional setting, granular data, and machine learning techniques, we assess the role adverse selection problems and incompatible lending technologies may have played in the commercial lenders’ failed entry and assess their effect on borrowers’ access to credit. We find that while commercial lenders suffered stronger adverse selection, this was not the main driver of borrowers’ higher delinquency rates. The large loans and lax terms they were offered played a more important role. Importantly, however, we also find that the commercial lenders’ failed entry carried significant short-term and long-term benefits, to both switching and non-switching microfinance borrowers, by forcing microfinance institutions to improve their terms