Word of the Week: Avoidance of Over-indebtedness

Word of the Week – Avoidance of Over-indebtedness:
A Client Protection Principle that states that providers will take reasonable steps to ensure that credit will be extended only if borrowers have an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness.
Responsibility for avoiding over-indebtedness rests with both clients and institutions. For clients, this means making prudent decisions and judging their repay­ment capacity. For institutions, this means carefully assessing a client’s ability to repay. Over-indebtedness is not the same as multiple-borrowing—when borrowers take simultaneous loans from several sources—because borrowers might be capable of handling several loans without becoming over-indebted. Nonetheless, lack of credit bureaus and information-sharing between providers poses risks because it prevents institutions from being able to verify the existing indebtedness of prospective clients.

Spotlight Fact: One of the greatest challenges around over-indebtedness is how to measure it. We understand over-indebtedness in general terms but it is difficult to articulate with measurable precision. As Rich Rosenberg asks, is a client over-indebted when a loan equals a certain percentage of her disposable income? Or is it when she says that she finds it difficult to repay? If we could define and measure over-indebtedness more clearly it will help us to prevent it.
Suggested Resource:

For more financial inclusion terms, visit the Center’s interactive Financial Inclusion Glossary.
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Flickr credit: sektordua

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