Authors: Asst.Professor Bhalerao Supriya Shivaji
Abstract: Background: Instalment loans have become a central instrument of household finance, particularly in emerging markets plagued by illiquidity and low financial penetration. Unlike revolving credit, instalment loans come with fixed periodic repayments, which add stability but also inflexibility that can make it difficult for low-income borrowers during economic downturns. Despite their ubiquity, the particular nature and behavioural consequences of such facilities have not been well accommodated by extant models for their associated credit risk. Objectives: The purpose of this research is to construct a multi-dimensional quantitative framework for understanding the economic, behavioural, and institutional aspects of instalment lending. Specific aims entail modelling borrower decisions conditional on income realisations, thinking through how loan contracts perform across income classes, and highlighting policy levers that reconcile financial access and systemic resilience. Methods: We used dynamical simulation, to which we applied a micro-founded stochastic model calibrated on representative household data. Borrowers were categorised by income and priced according to different loan terms, interest rates, and enforcement regimes. Results were evaluated by Monte Carlo simulations and scenario-based testing regarding consumption variability, default risk, and lender profitability. Results: The findings indicate that longer loan durations help lower default risk and increase consumption smoothing, especially for more financially fragile households. Such high interest rates, however, have deep adverse effects on household welfare and the profitability of high-risk segments. Lower contract enforcement strength of institutions plays a key role in mitigating strategic default and in enhancing recovery. Fixed interest-rate segments of subprime lending earn negative margins, which are consistent with dynamic risk-based pricing. Conclusion: Finally, it is important to note that instalment lending offers vast potential for welfare and inclusion, but it must be designed with borrower heterogeneity and institutional frictions in view. The research suggests that risk-sensitive regulation and adjustable repayment terms, and credit training play a critical role in facilitating responsible lending. The proposed model is in the direction of creating a more inclusive, stable, and data-driven consumer finance ecosystem.
