Investigating What Happens to Clients Who Default

> Posted by Laura Galindo and Alexandra Rizzi, Senior Associate and Deputy Director, the Smart Campaign

A few days ago a post on this blog detailed debt collections practices in the United States. The Smart Campaign, led by Jami Solli of Consumers International, is working to shed light on provider practices in microfinance through exploratory research in Peru, India, and Uganda.

Once a client becomes seriously delinquent and moves into default, the possibilities for serious consequences for the client arise. Yet little is known about how microfinance institutions treat clients at these later stages. What alternatives do providers offer to clients who are in protracted arrears? How are clients treated when they are defaulting on multiple loans? What do clients experience during this difficult and stressful stage? And after the default, are client debt obligations resolved? Is there a concerted effort to rehabilitate or re-include defaulters?

In September, the Smart Campaign kicked off a research project to explore what happens to clients who default. The project focuses on how microfinance practitioners treat defaulting clients. It is scanning for best practices around the world – like debt mediation projects in Europe and middle-income countries – and examining practices in detail through interviews with practitioners and regulators in Peru, India, and Uganda. Interviews were also conducted with credit bureaus, debt collections agencies, consumer advocacy/protection groups, and researchers specialized in those markets. These countries were chosen, in part, because of their variation in credit bureau infrastructure and the hypothesis that this would have significant impact on provider practices.

This post is to report that we are two-thirds of the way through the field interviews, having visited Peru in November and India in December. Interviews in Peru were conducted by Jami Solli, the lead consultant for the project, along with Laura Galindo of the Smart Campaign. Analysis was based in part on the early findings of a global survey (described in the “D is for Default” blog post), which helped the team understand common practices and trends, and determine the right questions to ask. More than 30 key players were interviewed from representatives of small, rural NGOs with average loan sizes of US$300 to large banks giving $25,000 lines of credit via a credit card. Target clients, too, differed – from the potato-growing contract farmer to the small restaurant owner who needs to buy a new oven.

In December, Jami visited India along with members of the Smart Campaign India team and Deputy Director Alexandra Rizzi. The team conducted face-to-face interviews with 31 market actors, hopping from Delhi, to Varanasi, Kolkata, Mumbai, Bangalore, and Chennai. During interviews, the focus was understanding the implications of default and whether all defaults are treated alike by providers. (For example, do defaulters who are ill or suffered a natural disaster receive more sympathetic treatment?) Additional topics included whether and when rescheduling is offered; whether and how collateral is seized; and the time period over which debt is actively collected.

The research team has been thrilled by the positive and open response from actors in Peru and India and are hoping for similar treatment in our last country, Uganda.

Information from individual providers will be kept confidential, and while it is still too early to publish any results without further comparative analysis, a sneak peak to aspects of the conversations from these three deep-dives will be shared through this blog.

Image credit: iStock

Have You Read?

“D” Is for Default

CFI Publishes ‘Over-Indebtedness of Microborrowers in Ghana’ by Jessica Schicks

Consequences of Over-Indebtedness: Lessons from India