What’s the Evidence on Over-Indebtedness?
This kicks-off a blog series on over-indebtedness. Over the coming weeks we’ll be featuring a variety of voices from across the globe on this topic. We welcome your participation in this discussion through comments.
While microfinance products and lending methodologies vary significantly on the ground, two main features of microfinance have made this enormous expansion of access to finance possible: microlending has become scalable due to cost efficient operating models and due to risk management methodologies that ensured high repayment rates.
We need to look more carefully at the interactions between microfinance institutions and their clients, examining how MFI practices play out in lives of clients on an everyday basis. Stuart posed two specific hypotheses: if a lender needs clients to borrow continually, it incentivizes overselling and overindebtedness, and that insistence on immediate, in-full repayment drives some clients to begin bicycling loans.
Microfinance Institutions in Andhra Pradesh and elsewhere in India are keen to avoid over-indebtedness or place clients in distress.
The consequences of over-indebtedness are shared among all stakeholders in microfinance. Households, individuals, and communities are affected by borrowers who cannot repay their debts.
While over-indebtedness can be difficult to observe in practice, we can use simple surveys to estimate one proxy for over-indebtedness: cross-indebtedness, or the number of institutions from which the typical borrower has a loan.