Microfinance Interest Caps And Borrower Delinquency In Rural Uttarakhand

Abstract

This study investigates the impact of microfinance interest caps on borrower delinquency in rural districts of Uttarakhand, India. Using borrower-level data from 1,200 respondents and institutional records from 50 microfinance branches, the study employs a Difference-in-Differences (DiD) framework and nonlinear regression models to assess the relationship between capped lending rates and repayment performance. The results reveal a U-shaped relationship between cap tightness and delinquency, indicating that moderate interest caps (22–24%) improve repayment behavior by enhancing affordability, while excessively tight caps (<20%) increase default risk due to weakened monitoring incentives. District-level analysis further highlights the influence of geography, income shocks, and borrower experience on repayment outcomes. The study concludes that context-sensitive, region-specific interest cap frameworks are essential to balance borrower protection, institutional sustainability, and financial inclusion in high-cost rural settings.