Some months ago I asked CGAP senior advisor Rich Rosenberg what he thought was the most pressing challenge for microfinance today, and his response–understanding over-indebtedness–was passionate.
The issue of over-indebtedness, and whether microcredit does more harm than good to clients living in poverty is all over the news as the issue has bubbled up in the Indian state of Andhra Pradesh and hit the global headlines over the past year from Bosnia to Nicaragua. But how much do we really know about levels of over-indebtedness, or even what is a reasonable level of debt for a poor household to carry? Over the coming weeks, CGAP will be running a series from leading experts on financial inclusion with their thoughts on the issue, and what the global microfinance community should do to address it.
Part of Rich’s frustration comes from the lack of robust research tools for understanding whether there is an over-indebtedness problem. “I am more concerned about getting a handle on the issue of over-indebtedness,” he told me, “than about fine tuning other areas of customer protection. Yes, fair disclosure of interest rates is important. Yes, avoiding abusive collections methods is important. Yes, protecting client privacy is important. But for me, the basics, basics, of customer protection is to avoid over-indebtedness.”
Tomorrow, Rich will share his latest thinking, and over the coming weeks he’ll be joined by other experts, from regulators who have been dealing with the issue, to researchers who have been gathering data. Join us and share your insights through comments to help move the conversation forward.
In the Indian context, pre-Malegam Committee report period, credit rationing may not have been a profitable strategy for MFIs as most of them were acting as a discriminating monopolist (who wants to maximise expected profits with respect to each borrower group separately and is free to charge each borrower group a different interest rate). When the interest rate restriction is imposed, then credit rationing would be the automatic response from the lenders (that MFIs charging identical rate of interst for all borrowers). Though, interest rate capping is not a desirable policy intervention, it does have an effect in reducing the over-indebtedness among the poor / low income group of people who avail credit from MFIs. With Malegam Committee recommending such interest rate cap (though being subjected to strong criticism by a large section of those associated with MF, one can reasonably hope that it will reduce the overindebtedness among the users of MFIs.