Consequences of Over-Indebtedness: Lessons from India

> Posted by Siddhartha Chowdri

Siddhartha Chowdri with clients from Bihar

Siddhartha Chowdri with residents of Bihar

Editor’s note: This post, originally published in June 2009, is one of this blog’s all-time most popular pieces of analysis. We are returning it to the front page to be sure that it’s available to everyone interested in the health of India’s microfinance industry, especially in connection with client protection.
At a financial literacy event I attended the other day,  I had a long conversation with some of the senior management of Grameen Financial Services (Grameen Koota) about the delinquency issues facing ALL MFIs in the Indian state of Karnataka. Their analysis of the chain of events that has led to the situation is the following:

  1. MFI borrowers are borrowing from as many as 6 MFIs and many local money lenders. MFIs do not have the systems to track how much debt their clients are taking on from the other MFIs.
  2. Some of these clients significantly exceed their capacity to pay and run into problems when managing these multiple borrowings.
  3. When faced with these problems, some of these clients turn to local leaders to complain about their situation.
  4. Seeing this as an opportunity to score political points these local leaders (politicians, mullahs, mafia, etc.) either force MFIs to stop operating  in the local areas or tell the local client base that they are being exploited and not to repay the MFIs.
  5. These local elements are now spreading their message to defy the MFIs throughout the state via local language media, including circulars, newsletters and word of mouth and preaching by local leaders.

The net result of this is an increasing level of financial exclusion:

  • All MFIs are also closing down or seriously reducing  their operations in affected areas and particularly to the affected community in state.
  • Many MFIs are beginning to severely cut back their disbursements to clients from particular communities as the local leaders from these areas are the major proponents of movements against the MFIs.

So far MFIs are mostly blaming the political elements and the clients. Few understand (or admit)  that in fact this is a risk of the business that we are in and that in many ways the MFIs are to blame.
This is a scary moment for the industry with its root cause being insufficient systems for tracking client indebtedness, unfettered competition, irrational growth expectations, and little analysis and understanding of the client’s ability to repay.
ACCION is now beginning to work in the politically charged and increasingly competitive states of Maharashtra, Gujarat, and Bihar.  We should take care not to repeat the mistakes that have taken place in Andhra Pradesh and Karnataka.
Siddhartha Chowdri is the ACCION International Country Manager for India.
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