Responsible Finance Forum

Too Much Microcredit? A Survey of the Evidence on Over-Indebtedness

Jessica Schicks and Richard Rosenberg
01 September 2011
Source:  Consultative Group to Assist the Poor (GCAP)

Microcredit has long had an enviable repayment record—levels of delinquency and default have been very low. But more recently, collection problems have appeared in some major markets.In a review of four countries, Chen, Rasmussen,and Reille (2010) reported that delinquent loans,which averaged 2 percent of portfolio in 2004,skyrocketed to 2009 levels of 7 percent in Bosnia–Herzogovina, 10 percent in Morocco, 12 percent in Nicaragua, and 13 percent in Pakistan. In some of these countries, subsequent levels have risen quite a bit higher. More recently, collection has collapsed in the Indian state of Andhra Pradesh.

Delinquency and default threaten the viability of microlending institutions. But this paper looks at repayment problems mainly from the perspective of the clients, not the lenders. We examine definitions of “over-indebtedness” in some detail,but as a rough, provisional definition to begin the discussion, let us say that borrowers are over indebted if they have serious problems repaying their loans. This definition implies a view that borrowers can be over-indebted even if they are repaying their loans.

Over-indebtedness often implies heightened vulnerability and further impoverishment of borrowers. Material effects include reduced consumption levels, late fees, asset seizures,downward spirals of ever-increasing debt, and eventually, a loss of creditworthiness. There are sociological effects related to peer pressure and a loss of social position, as well as psychological effects on mental and physical health. In extreme cases, borrowers’ desperation can even lead to suicide. The objective should be to reduce the prevalence of over-indebtedness to reasonable levels. Complete elimination of over-indebtedness is not a practical goal: the only way to accomplish this would be to drastically restrict access to microloans. Many measures to reduce over-indebtedness can have some degree of negative impact on borrower access and cost. For instance, tightening credit standards will lower over-indebtedness, but it will also prevent some loans to borrowers who would have had no difficulty repaying. Careful balancing is needed.

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