M2i Discussion Note: Credit Risk Management in MFIs

The credit risk measurement systems in MFIs need to evolve substantially in order to sustainably provide collateral-less loans to poor clients. While lending through the group guarantee mechanism has ensured sound portfolio quality for long periods of time, we have in the recent past witnessed situations when there has been a rapid decline in portfolio quality. At times, these have happened without any warning primarily catching the MFI management unaware. This paper shows some additional indicators which allow MFIs to measure their portfolio quality realistically.

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