In a CGAP blog entitled ‘Multiple borrowing or multiple lending – who is to blame for debt fatigue?’ [1] Mr N Srinivasan explores the microloan repayment problem that has affected some districts in the Indian state of Karnataka. The issue has been covered in a previous article on the Wall Street Journal, which became of the subject of a recent Microcapital.Org Story [2].
According to Mr Srinivasan, the issue of poor repayment is less significant for larger MFIs while some small MFIs face material repayment problems. The blog states that the size of the affected portfolio in the region is estimated to range between USD 12 to 15 million. He added that ‘we shouldn’t think of this in terms of the sub-prime crisis’ but that microfinance participants ‘should draw lessons from [these] events’. Mr Srinivasan observes that ‘the common thread across locations in which repayment problems have been experienced is that customers are showing signs of fatigue arising from debt’. Competition can lead to unhealthy practices as more than five MFIs compete for the same clientele in some areas and, exceptionally, more than ten MFIs operate in one location. He adds, ‘taking advantage of the label of microfinance, some predatory lenders have started “MFIs” with highly undesirable lending practices bringing the entire sector into potential disrepute.’
On the other hand, one cannot blame MFIs entirely for this problem. Whilst competition may have lowered lending discipline and borrower selection standards, the ‘incentive structure for staff rewards customer acquisition and portfolio growth more than quality’. In addition, poor information exchange between MFIs have blinded them to ‘facts and developments that are critical’. Mr Srinivasan adds that 25% of borrowers in urban and peri-urban areas have borrowed from more than 5 MFIs, according to informal estimates. The average borrower in these areas would have three MFI loans.
In response to the problem, some MFIs are collaborating to scale down loan sizes and share information about defaulters. Concerted attempts are also being made to review concentration levels of credit exposure and strengthen borrower appraisal systems.
The awareness among borrowers that if MFIs cease operations, they would be left with no viable access to credit, is increasing. A group of women clients met the local masjid or mosque committee in a town in the Kolar region and urged the committee to reverse an earlier decision that microloans should not be repaid. Mr Srinivasan concludes that this is a valuable learning process for MFI credit officers and hope that they ‘will learn to spend more time and effort knowing their customer and how [he or] she responds to other externalities.’
Related Microcapital.Org publications on the issues raised here such as over-indebtedness [3] and consumer protection [4], [5], [6] are set out in the Bibliography section below.
By Chinq Yee Chong, Research Assistant
Bibliography
[1] CGAP blog entitled ‘Multiple borrowing or multiple lending – who is to blame for debt fatigue?’: http://microfinance.cgap.org/2009/08/28/multiple-borrowing-or-multiple-lending-%e2%80%93-who-is-to-blame-for-debt-fatigue/
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