Over-indebtedness: A Practitioner’s Perspective
Like most microfinance practitioners, particularly in the sub-continent, I have thought a lot about the issue of over-indebtedness in the last few months. It’s not that it was any less of an issue before, but the Andhra Pradesh meltdown really made me question seriously whether we in Bangladesh have also been cavalier to the point of being reckless about the amount of credit we have sold to our clients.
Milford Bateman in an earlier post in this series seemed to suggest that it was the ‘commercialization’ of microfinance and alleged tendency of senior managers to enrichthemselves that are to blame for borrower over-indebtedness. Maybe he is right with regard to some other countries, but this is not the case as far as Bangladesh is concerned. Sure, MFIs in Bangladesh have “commercialized” insofar as they have moved away from donor funded microfinance in the 1990s to a self-sustaining microfinance model in the 2000s. But almost all microfinance players here are non-profits that re-invest surpluses back into their portfolio and there is little or no evidence of abnormally high salaries or private enrichment of senior managers.
Yet, though due to the absence of any credit profile I have no way to know the exact percentage of borrowers who fall in the over-indebted category, I have a hunch that the percentage is high enough, particularly in certain regions of the country, for us to be concerned about it. While I don’t agree with Mr. Bateman that it is commercialization that is solely to blame, I do agree that almost all the microfinance players bought into the idea propagated by some advocates that microcredit is the silver bullet to eradicate poverty and all that the poor people need is more and more microcredit.
This belief prompted MFIs to seek fantastic growth in the numbers of borrowers and sizes of portfolio over a 15 year period in which they, or we, did not stop to assess whether more and more credit was causing some people to become over-indebted. (I strongly believe though that the vast majority of microfinance borrowers in Bangladesh have economically benefitted from having access to institutional financial services.)
I completely agree with Richard Rosenberg that every credit program will leave some borrowers worse off. This might be because of pure bad luck, as Mr. Rosenberg has demonstrated with a great example in an earlier post. In Bangladesh, many borrowers become unable to repay their loans midway through the loan cycle because a sudden health shock in the family or a natural calamity wipes out their assets and income source.
In these cases as well, one cannot blame the loan officer or the borrower for taking a loan that ultimately made her worse off. What matters in these types of situations is what action the MFIs take once the borrower starts to default, as that can further deepen vulnerability or help build resilience. That, however, is a separate discussion.
But what about those instances where a borrower, at the very outset, takes on more debt than she can possibly repay, or will become economically worse off as a result of paying back? I have heard some microfinance practitioners argue that the MFIs are not to blame for this because they are not forcing anyone to take loans. The problem, they say, is created by the borrowers themselves because they don’t know when to stop. There is of course some truth to this. However, I belong in the camp that thinks that the MFIs here are, at least in part, to blame for borrower over-indebtedness, whatever the extent of it may be.
It is true that often the borrowers take on too much debt, wittingly or unwittingly, and the loan officers lack the capacity, the information, or both, to recognize this and pull back on disbursements. But just as often if not more so, it is the loan officers of MFIs who seduce their clients into taking on too much debt because they are incentivised on hitting sales targets that, at least for some time, were over ambitious. This was made worse by the fact that the microfinance industry, though chasing fantastic growth on one hand, had stopped innovating on the other and was offering much the same product to every type of borrower.
Whether it is the borrowers who took on more debt than they could handle or the MFIs that pushed too much debt on to borrowers or whether both have been complicit in this, I believe that MFIs now have a responsibility to intervene on both the demand and supply sides to counter the problem of over-indebtedness.
On the demand side, the MFIs can work to increase the financial literacy of their clients so that borrowers can take better financial decisions. Providing financial literacy training to millions of borrowers will, of course, drive up costs. But perhaps the time has come for governments and donors to subsidize these kinds of activities of MFIs rather than the loan fund itself. On the supply side, the MFIs can work to ensure that too much credit is not pushed on to borrowers through a number of steps.
First, the MFIs can set more realistic and sensible growth targets that are desegregated over space and time. Second, MFIs can re-train their frontline staff and assess their performance not only in terms of sales targets and portfolio quality but also in terms of other non-financial indicators of borrower wellbeing. Third, MFIs can work towards a greater sharing of information among themselves through the setting up of a microcredit bureau so that decisions are not based on partial information in a country where multiple loans are an endemic feature of microfinance. And lastly, there is tremendous scope for innovation and product development in the microfinance space.
I do see signs of progress on most of the issues in Bangladesh, particularly on the supply side. The large MFIs seem to be revising down their growth targets, there are ongoing experiments with new products and there is some hope that a microcredit bureau, at least on a limited scale, will see the light of day within a year or so. These are positive signs as far as I am concerned and indicate that MFIs have begun to counter the problem of over-indebtedness before it becomes a major issue in this country.
Also in this Series
Over-Indebtedness in Microfinance – Who Should Bear the Risk?
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 Keep Learning about Overindebtedness
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.
Comments
Dear Shameran Abed
Dear Shameran Abed
It is a nice posting from practitioner’s perspectives although making subtle difference from supply side factors for the said problem. However, I wish to share a few points on the subject
1. Occurrence of over indebtedness happens irrespective of type of agencies ( MFI or banks ), mode of financing (commercial or non commercial) and sources of funding (donor or re- investible surpluses), unless the delivered micro credit is productively utilized at clients’ household level with adequate supporting facilities for income generation in the process of such a function of the money..
2. Regarding your belief given in parenthesis that ‘the vast majority of microfinance borrowers in Bangladesh have economically benefitted from having access to institutional financial services’ it would be more useful to know which category of borrowers on poverty segment benefitted and whether they have been benefitted by micro credit only or micro credit plus services ? BRAC has done lot of pioneering innovative works in ‘’credit plus’ and ‘integrated services’ to the poor while most of the MFIs confine to micro credit services only. Here I believe micro credit alone be it silver bullet or goldEN pistol ( the villain of peace in AP crisis) cannot function in vacuum and is inadequate for the said mission –poverty reduction.
3. To quote,‘Every credit program will leave some borrowers worse off. This might be because of pure bad luck’, The above argument by Rich and your agreement to it probably may be right from the practitioner’s perspectives. .But it is disturbing from clients perspectives on one hand and incidentally providing a strong base for further research and innovation in MF arena on the other hand on many counts.. First, is the phenomenon -borrowers’ (even some) worsening off ‘because’ of faulty design of the credit programme or ‘in spite of’ faultless design of credit programme? Secondly, although it is agreeable from supply point of view, is it justifiable under microfinance concept which emerged as a panacea for poverty reduction? Third, if some poor borrowers became worse off, who is to take care of them and how to rejuvenate them also in the context of achieving MDGs. Fourth, will this situation not result in widening the intra inequality gap among the poor? Fifth, assuming such worsened borrowers in micro credit programme particularly in SHG system, are dropped out or pushed out will it not result in financial exclusion? Sixth, the report of Microfinance India –state of the sector -2008 points out that 43% SHGs reported drop out with the drop out rate of 8.2% of members and also on the mortality of groups. In this context, if every credit programme leaves some borrowers pitiably worse off and consequently dropped out of financial system, will it not damage the SHG system over a period of time the very business base of .Indian MFIs at grass root level.? ( I am interested to know the experience in attrition phenomenon in group system in Bangladesh in general and BRAC in particular? In the last, is attribution of ‘ pure bad luck’ for the cause of borrowers becoming worse off ethically correct?
The main focus in the above arguments is how to ensure provision of an in- built protective mechanism in the design of the credit product itself in all credit programmes in a manner not to leave even in some cases of borrowers worse off ? What are the role of other micro financial services such as micro savings, micro insurance, money remittances/transfer facility, etc in addressing the over indebtedness problems ?(e.g. integration micro insurance with the micro credit either for protecting the livelihood, or health or both from various risks including co-variant , may help protecting form the worse off situation to a greater extent.) When we globally revolutionized in making the ‘poor credit worthy’ attracting the attention of Nobel committee (Thanks to Prof Yunus), the situation with ‘leaving some of them worse off in ‘any credit programme’, suggest lack of innovation and research in designing the MF product and services holistically in MF arsenals for the battle against poverty. I reiterate that Why Microfinance industry has stopped innovation while chasing faster growth as you correctly remarked ?Discussion on such type of action by MFI for helping the borrowers build resilience, I feel, could be very well brought here instead of separately as it would help appreciate the dynamics of over indebtedness being the main subject of this blog series in particular.
4. . Although the above argument made from client’s perspectives, I agree and also share your anguish on their irresponsible behavior with multiple borrowing and its eventualities. This fact I have elaborately made in my response to Rich in his earlier posting – ‘Flying blind on over indebtedness’ in this blog. . The point that the practitioners need to intervene on both demand and supply sides to counter the indebtedness problem is well appreciated and to be followed by the other players in the field.
With good wishes
V. Rengarajan
I only Comment on this post
I only Comment on this post…because I have some views that might benefit in minimizing the risk also making the expenditure to reach that state feasible. I do lack in both knowledge and experience to say anything about the MFIs.
What I felt with my exposures to these issues is… over-indebtedness happens because of lack of information by field operations, lack of judgment by field operation and pure corruption.
Corruption is MFIs own problem. (Think of a local MFI, if a staff is found to be doing anything wrong, chances are he will be beaten to death without anyone knowing about it). Large MFIs employ more people thus “more the merrier” doesn’t stand for them.
The issues on information and judgment can be addressed.
For instance,
What if the Bangladeshi Voter ID system is used to its fullest potential.
What if a central database is reserved against each ID about their credit information, their general profile, etc.
What if the Government Puts up an Agency to update all this information.
What if ID holder is forced to use this ID in reference of all he does.
What if Government charges anyone who wants to use this information a premium fee, according to the sensitivity of the information.
I guess finding customers for this sort of “information service” won’t be an issue…but Government should realize this on their own. (Or should be persuaded to do so)
Must be said, lot of the Governments own Issues will also be address (especially Tax Wise)
Sudden calamities are an exception and with proper nurture can be taken care of (as no earthly being can Judge that). When it comes to Judgment…it can only happen with proper information. A good filed level staff for his own benefit will do the proper judgment…he knows how to add income and how to deduct expenditures. He also knows whether the remainder is greater or less than the installment size or the multiple installment sizes.
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