Credit Market Saturation: Anatomy of a Recent Debate

CGAP has been closely following the issue of over-indebtedness and market saturation of retail credit in several markets (Morocco, Bosnia, Pakistan, India). Most recently, the South African regulator, Gabriel Davel proposed several options for regulators and financial institutions to preempt and prevent credit bubbles. In early 2011, Richard Rosenberg and Jessica Schicks surveyed in great detail the evidence on measuring over-indebtedness, especially from a client perspective, concluding that we are essentially “flying blind” in markets where credit bubbles have not surfaced yet.

Over May and June 2013, CGAP’s blog has been hosting a series on data on market saturation, featuring guest authors who cross compare market level data, as well as research in individual markets like Morocco, and Tamil Nadu in India.

A fisherwoman repairs her net outside her house.

Based on household level data, as well as interviews with MFIs and banks, Isabelle Guerin’s post “Loan defaults versus over-indebtedness in rural Tamil Nadu”, argues that defaulting on loan repayment does not necessarily mean that the client is over-indebted. The author’s research spans a period of ten years, and revisits villages and households. Default can be “strategic”, where a client does not repay because she chooses not to, or cannot repay because of a liquidity crunch. She further argues that payment of loans does not indicate that there is no over-indebtedness, because her data show that MFI loans account for less than 20% of the household debt portfolio. Clients are borrowing from informal sources (often flexible and readily available), as well as SHGs, and consumer credit companies. She does not argue that there is either a repayment problem or an over-indebtedness issue in the market overall.

In reply to Isabelle’s post, the IFMR blog featured a response by Vaibhav Anand who argues, based on solid supply side data, that clients are neither defaulting nor are over-indebted in Tamil Nadu. IFMR Capital, a non-banking finance company with microfinance exposure across India, conducted monitoring visits in Tamil Nadu, covering 7 partner MFIs arguing that their collections percentage was close to 100%. Further, collection efficiency of IFMR Capital’s securitized microloan pools has consistently been high. As of March 31^st, their average collection efficiency on 33 active securitized transactions with pools originating from Tamil Nadu was 99.82%. The piece also points out the securitized pools from Tamil Nadu and other states are improving on defaults.

Tamil Nadu has a population of 72 million, with an estimated 13 million people living below the poverty line. Unlike the north, India’s southern states have better and more diverse supply of retail credit, through a wide range of informal and formal institutions. In such a large and complex market, it is probably not surprising that the authors’ methodologies and samples would yield somewhat divergent pictures. But both Isabelle and Vaibhav are trying to get at questions that the global financial services industry is struggling with. Justin Oliver’s piece on multiple borrowing in Andhra Pradesh raised similar issues.

The key question for me in this debate is:

Is repayment or default of a microfinance loan an adequate indicator of over-indebtedness in markets where the range of credit tools used by clients is as diverse and complex as those available in Tamil Nadu?

As Vaibhav points out, recent developments in India, like MFI regulation and development of credit bureaus, have contributed to stronger practices and transparency in MFIs. However, as Isabelle points out in her response, credit bureaus, and I would argue that even household surveys, cannot capture all debt from all possible informal sources.

There is need for more energy and innovation in measuring whole-market penetration and the potential for saturation, both at the market level (through early warning signals), as well as understanding demand and use at the household level through a range of methods.

The next post in this series features a new tool called Microfinance Index of Market Outreach and Saturation, which measures global credit saturation levels across markets.

Also watch this space for: CGAP colleagues Greg Chen and Stuart Rutherford have worked on getting client perspectives in a mature microfinance market like Bangladesh which will be released on the blog this month.

---- Based out of New Delhi, the author is the editor of CGAP’s blog, and manages CGAP’s G2P learning agenda in India.