> Posted Siddhartha Chowdri
Siddhartha Chowdri with residents of Bihar
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:
- MFI borrowers are borrowing from as many as 6 MFIs and many local money lenders. MFI’s do not have the systems to track how much debt their clients are taking on from the other MFIs.
- Some of these clients significantly exceed their capacity to pay and run into problems when managing these multiple borrowings.
- When faced with these problems, some of these clients turn to local leaders to complain about their situation.
- 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.
- 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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June 18, 2009 at 6:54 pm
David Roodman’s Microfinance Open Book Blog » Blog Archive » The Dangers of Overlending in India
[...] Chowdri, ACCION International’s Country Manager for India, has posted a warning on the blog of the Center for Financial Inclusion about the dangers of overheated competition and [...]
June 19, 2009 at 8:31 am
Aparna Dalal
I appreciate your balanced perspective. If overindebtedness is recognized as a serious concern in certain Indian states, establishing credit bureaus to enable sharing of client information is part of the solution. But, it’s probably equally important to set the correct incentives to ensure that staff and the financial institution as a whole are not only interested in making new loans, but have a stake in correctly assessing the client’s ability to repay. This seems to be a clear message from the current mortgage crisis.
June 21, 2009 at 11:19 am
Bhalchander Vishwanath
Nice article which brings out the increasing risk in microcredit. There is a study on overindebtedness and repayment done by BRAC.
http://microfinance.cgap.org/2008/12/08/is-more-credit-always-good-credit/
The sub-crime crisis happened despite credit bureaus and information sharing across financial institutions. I don’t believe that these measures by themselves are adequate to avoid a crisis. The MFIs in due course may just start making larger loans. The added in complexity in microcredit is that the clients and loan officers are of significantly lower educational level than what we saw in the sub prime crisis.Moreover microloans are non-collateralized which means in case of massive defaults it could wipe out MFIs.
Given that some of the equity investors expect nearly 40% per annum return on investment and MFIs are on trying to grow extremely fast and spread their geographic operations far and wide to give these returns to investors, I anticipate that some of these MFIs are likely to be challenged to maintain sane internal controls.
In Bangladesh the biggest MFIs are non-profits or member owned and perhaps they could more easily realign their organization to social goals rather than just making loans whenever client overindebtedness rose. In India they are for-profit institutions largely owned by PE funds/ VCs. It will be interesting to see how the large MFIs in India respond to these emerging challenges.
Bhalchander
June 25, 2009 at 4:54 pm
Global Voices Online » India: Over-indebtedness And Microcredit
[...] Chowdri at Center For Financial Inclusion Blog comments that over -indebtedness and borrower delinquency are to blame for failure of the Micro Finance [...]
July 27, 2009 at 7:32 pm
If Microcredit Had Bubbles, Would We Know? | David Roodman's Microfinance Open Book Blog
[...] as I blogged, Siddhartha Chowdri, Accion’s director in India, has pointed to multiple borrowing as a source of the political blow-up in Andhra Pradesh (AP) in 2006 and newer [...]
August 13, 2009 at 8:49 pm
Wall Street Journal Also Raises Microcredit Bubble Fears | David Roodman's Microfinance Open Book Blog
[...] one inspiration for my own post on this subject was another bulletin from India. From my desk in Washington (well, actually cottage back porch in Maine), I cannot [...]