Multiple Borrowing or Multiple Lending and Debt Fatigue

In some districts of Karnataka State (India) there has been resistance to repay loans taken from MFIs (also refer to the WSJ article on repayment problems in that state). In Kolar the Muslim clergy have given the call, pronouncing the MFI loans as un-Islamic; in Mysore a ten day curfew that followed a communal clash created repayment problems, in Tumkur another local group asked the MFIs to pay some kind of protection money to carry on their business resulting in repayment disturbances The size of the affected portfolio is estimated to be between $12 and 15 million. For the large MFIs, the problem is very small, while some small MFIs have a large problem. The MFIs are confident that the problems will be resolved and that they would recover most of the loans. The affected portfolio is tiny: less than 0.5% of overall outstanding loans. So we shouldn’t think of this in terms of the sub-prime crisis. Nonetheless we should draw lessons from those events.

The common thread across locations in which repayment problems have been experienced is that customers are showing signs of fatigue arising from debt. Typically, more than five MFIs compete. Exceptionally, more than ten MFIs operate in one location. 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.

But MFIs can’t entirely blame external intervention for their problems. Competition seems to have lowered lending discipline, borrower selection standards, and weakened the relationships with customers. The State of the Sector report 2008 on Indian Microfinance covered some of the negative fallouts of unbridled competition. The incentive structure for staff rewards customer acquisition and portfolio growth more than quality. In some cases, field staff overlook the existing debts of potential customers and their limited repayment capacity. The lack of an information exchange between the MFIs made them blind to facts and developments that are critical. Informal estimates are that 25% of borrowers in urban and periurban areas have borrowed from more than 5 MFIs. The average borrower in these areas would have three MFI loans.

Collaboration, at least for the present seems to have won over competition in Karnataka. Now the MFIs are taking some concerted action–scaling down loan sizes, setting up a system for exchanging information about defaulters, reviewing concentration levels of credit exposure and strengthening borrower appraisal systems to bring in more quaity information. The awareness among the borrowers that if MFIs shut up shop they would be left with no viable financial services access is increasing. A group of women clients met the local Masjid Committee and pressured them to reverse the decision (of not repaying loans) in one of the block towns. For the MFI sector, this is a critical part of its evolution and a valuable learning process. Hopefully MFI credit officers will learn to spend more time and effort knowing their customer and how she responds to other externalities.



10 September 2012 Submitted by Dr S Santhanam (not verified)

Dear Sir
It looked like reading a movie / cine fiction. The punchline is “A group of women clients met the local Masjid Committee and pressured them to reverse the decision (of not repaying loans) in one of the block towns.” The willingness to pay notwithstanding the announcement for waiver of bank loans, pressure from the clergy and similar external pressures is the key difference between mf programmes and other programmes. With all the characters in full play, the hero (mf) getting all punches throughout and in the end coming out victorious is typical of all indian cinema themes. Just because some failures in bank loans, bankers do not stop lending as their business is to lend and earn income. So, the lesson is that one should have faith in mf and move ahead. As the objective of mf is to improve the economic status of poor in any part of the world, let us work for its success.

10 September 2012 Submitted by Sara Duke (not verified)

I agree, these happenings are akin to “growing pains,” for the microfinance sector. However, I do not forsee the sector going down like the “Titanic,” but rather it is being pushed to technologically evolve and produce a client information sharing credit desk. The big question will be, will be – “Will the sector come together and collaberate on this vital need?”

10 September 2012 Submitted by Dr V.Rengarajan (not verified)

I agree that the two problems of multiple borrowing and multiple lending are causing concern very much in Micro finance arena as timely highlighted by Srinivasan. The prevailing dilemma in the causative factor of the problem is whether the former leads to the later or vice versa. ( like egg and chick riddle) However, an anatomy on this phenomenon reveals that there is hardly any space for ethics in MF arena which is required for making it subtle difference with other pro poor finance in the market driven economy.
It is irony to note that these unbridled unethical practices which causes ‘debt fatigue’, are
observed both in demand and supply side. The root cause for it , is due to a visible “shift.” from the mission to practice by the MF players.
From the demand side, there is shift in utilization of micro credit from ethical end use ( income generation or genuine need based ) to unethical end use ( ostentatious consumption ) thanks to Media world ( WSJ article. as in the case of Ms Taj besides many empirical evidences of my studies) There is also shift from ‘self help’ and ‘Self reliance’ based life to a( debt )dependent or parasitic life always. Eventually in the process of change, repayment ethics has become first causality with the enhanced level of debt.
From supply side, there is a shift from social engineering to financial business engineering practiced with unethical practices in both delivery and recovery process in the poverty sector. There is also shift in product design from demand based to supply oriented. In the case of provision of MF services to the poor clients, more focus on solo input namely micro credit instead of all other financial services and non financial services actually needed for sustainable poverty reduction. A major visible shift is from the role of counseling and guidance with all MF services to profit motivated commission agent for selling loans unethically (e.g. repeat loan for clearing the earlier debt – for whose survival?)
The captioned twin problems were found earlier also in multi sector banking system in India and ‘service area approach’ with the demarcation for each players and practice of insistence of ‘No over due certificate’ before lending and exchange of information in coordination forums among the players at district level under ‘lead Bank scheme’ facilitated for addressing the problems like multiple loaning and multiple borrowing. The inclusion of MF players in such coordination forums and guiding them in falling line with other financial players for practicing ethical financial practices collectively in a given area may help in avoidance of unhealthy competition and unethical practices by both the borrowers and lenders.
In fine, whatever the rules of the game are framed , healthy participation depends on how the players in the field adhere to it in practice with or without referee in the field. This pathetic situation exists because there is a major drift in ethics discipline where traditional economics once occupied as a branch of it: but over a period of time contemporary economics, although an offshoot of Ethics (A.Sen) has occupied significant place with non ethical character focusing more on material welfare development of modern society. .In the process the values of ethics is lost with all the negative eventualities such as equity gap. poverty, deprivation. marginalisation, in our contemporary development models.

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