Flying Blind on Over-indebtedness?

In a video-taped interview seven months ago, I expressed a degree of optimism that, historically at least, we had not been over-indebting unacceptable numbers of poor microborrowers, based on an admittedly tenuous inference from high repayment levels in most of the world. Since then, various conversations and data points have left me less comfortable with that inference.

My guess was that most large, sophisticated MFIs had gotten pretty good at the reporting collection performance accurately. This may have been naïve: for instance, Sanjay Sinha says that recent portfolio testing by M-CRIL in a range of leading Indian MFIs revealed unsustainably high loan losses, notwithstanding published financial reports saying all was well. (Assuming this is true, is the problem data systems that still can’t do the job, or is it a deliberate pre-IPO window dressing by management?)

But let’s assume that reports of high repayment in most markets are true. If, as many practitioners think, the preponderant motivation to repay uncollateralized loans is the borrowers’ desire to keep future access to a valued service, then high repayment would seem to suggest that few of those borrowers think that they’re getting too deeply in debt. But conversations with David Roodman, Esther Duflo, and Abhijit Banerjee have forced me to recognize that we don’t really know how much of the loan repayment is driven by other factors, including pressure from groups or loan officers. If these latter motivations are widespread, borrowers may be repaying even if they haven’t experienced their loans as helpful.

Most importantly, microcredit markets are becoming saturated in more and more places. (This can happen at penetration levels that seem low: we microfinance enthusiasts tend to overestimate the percentage of the eligible population that will want a loan at any given time.) Gabriel Davel, South Africa’s former consumer credit regulator, observes that when competitive retail credit markets approach saturation, problems with over-indebtedness are almost inevitable: One probably shouldn’t expect microcredit to be an exception, given that few microcredit markets have good credit bureaus that allow a lender to check a loan applicant’s repayment of loans from other providers.

The point is not to assert that we have a generalized problem with over-indebted microborrowers. The point is that for most markets we simply don’t know. We’re flying blind in the face of a clear and present danger. Fortunately, more researchers are starting to look at levels of debt stress. But we’re still a long way from having solid, practical tools—especially early-warning tools—to identify problems. High default levels sometimes (not always) can tell us, after the fact, that a lot of clients have gotten over-indebted. But low default levels don’t mean that everything has been OK, even if the reporting is competent and honest. Borrowers might be repaying only at the cost of unacceptable sacrifices.

The obvious question here is what “unacceptable” means. That turns out to be an annoyingly complex topic that I don’t have time to write about, and you probably don’t have the time to read about, just now. I’m sure the question will rear its head in connection with later blogs in this series.