New Report: Regulatory Options to Curb Debt Stress

19 March 2013


Jeanette Thomas
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Kai Bucher
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Regulatory Measures Can Curb Debt Stress While Developing Responsible Credit Markets
Washington, D.C., 19 March 2013: The right package of regulations can rein in reckless lending while allowing development of healthy credit markets that extend access to underserved households and very small businesses, according to a report published by CGAP today. The report Regulatory Options to Curb Debt Stress offers a policy framework for preventing and managing debt stress, which occurs when individual households or whole market segments become over-indebted. 
Regulators in lower-income countries aim to strike the right balance: encouraging broader access to credit for the household segment as a whole while discouraging reckless lending to those at risk of getting over-extended. Outlining specific regulatory approaches for early-stage and more mature markets, the report highlights indicators – such as rapid growth in the number of lenders targeting the household credit segment, the size of their portfolios and average loan sizes, or debt collection activity – that regulators can use to monitor this credit market and get an early warning when the risk of debt stress is increasing.
“While debt stress is a warning sign to the credit market, it is also a sign of the success of previous strategies for credit expansion and financial inclusion,” commented Gabriel Davel, former CEO of the South Africa National Credit Regulator and author of the report. “The challenge for countries lies in developing regulatory strategies that deal with the risks of increasing credit access rather than rolling back commercialization of the sector.”
The report explains how household credit markets are prone to cycles of rapid growth, consumer debt build-up, and overheating. Understanding these cycles has significant implications, and can help regulators detect debt stress early and inform appropriate policy responses to rein in undesirable credit practices and product features. 
“Debt stress can harm borrowers and lenders alike. As we have seen, it can also result in serious social unrest and political interference,” said Katharine McKee, Senior Advisor at CGAP. “We hope that this report will provide policy makers with appropriate options to address the causes of debt stress early on in the credit market development cycle.”
The report draws on specific country examples such as South Africa and Peru to show policy responses to cycles of aggressive lending and over-indebtedness in the consumer credit sector, proactively using a range of regulatory, enforcement and non-regulatory measures (such as consumer awareness campaigns and industry responsible lending initiatives) to illustrate such policy options.  The report offers multiple country examples and detailed analysis of each option and how it can be applied.

About CGAP

CGAP (The Consultative Group to Assist the Poor) develops innovative solutions for financial inclusion through practical research and active engagement with financial service providers, policy makers, and funders. Established in 1995 and housed at the World Bank, CGAP combines a pragmatic approach to market development with an evidence-based advocacy platform to advance poor people’s access to finance. Our global network of members includes over 35 development agencies, private foundations, and national governments that share a common vision of improving the lives of poor people with better access to finance. More at