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How Do Microfinance Clients Understand their Loans?

Akhand Tiwari, Anvesha Khandelwal and Minakshi Ramji1

Centre for Micro Finance

At the Institute for Financial Management and Research

24 Kothari Road, Nungambakkam, Chennai, India 600034

October 2008

1 The authors are Research Associates at the Centre for Micro Finance (CMF). To learn more about CMF, you

may visit their website at A summary of these results appeared in an article in the CMF

newsletter Eye on Microfinance, volume 8, “How Do MFI Clients Understand their Loan Contracts?” available


Thanks are due to Professor Sendhil Mullainathan at Harvard University under whose guidance this study was

conducted. Valuable inputs in designing the study were provided by Sudha Krishnan at Ideas 42, Harvard

University and Annie Duflo, currently Research Network Director at Innovations for Poverty Action, New

Haven, USA. The authors express

their heartfelt gratitude to the two microfinance institutions BSS

Microfinance Private Limited and Sonata who participated in the study and their staff for extending their

support during the implementation of the study and providing us with valuable insights into the workings of

their respective organizations. Special thanks are due to Dr. Ramesh Bellamkonda and Mr. Panchakshari at BSS

and Mr. Anup Singh, Mr. Ashish Gupta and Mr. Rakesh Dubey at Sonata.

Page 2

Executive Summary

In recent years, discussions on microfinance policy and regulation in

India have tended to centre on the extent to which small borrowers

understand their loans and the financial liability implicated therein. The

paper aims to provide an explanation of how MFI clients understand

their loan contract and the implications for policy. We find that small

borrowers are able to identify the size and duration of the loan and


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