Virtual Conference on Multiple Borrowing and Avoiding Over-Indebtedness

On the 12th and 13th of January, a Virtual Conference was organised by CGAP in association with Microsave and IFMR. Personally, this was the first time I ever participated in a virtual conference (as a facilitator and participant). A platform wherein the speakers, moderators, facilitators and the audience are individuals seated in front of a computer – not conventional for sure. However, the perspectives and queries shared highlighted quite a few things. Multiple borrowing is not a new phenomenon and the reasons behind the same are not rocket science. However, keeping in mind with the recent turn of events, the virtual conference did throw light on the factors revolving around the case of over-indebtedness.

One concern that was resounded by participants and moderators across was the increased need in understanding clients’ behaviour towards loans and the external factors that influence the same. Also, it is high time that institutions do not enforce stringent measures in order to discipline the clients’ credit discipline – this ploy as history suggests is more likely to backfire and not induce any sort of discipline. It also would be good to see if the seasonal nature of occupation for many of the clients’ has any bearing on their financial behaviour. Many studies worldwide have shown that in certain scenarios, clients indulge in multiple borrowing due to lack of avenues for savings. Perhaps, in order to maintain a good healthy transaction relationship with a formal lender, the client may tend to borrow from informal sources. Monitoring clients’ financial behaviour must be done keeping the prosperity and well-being of them in mind.

Chasing a client in the name of repayment has only heightened the chances of default and with an extremely competitive environment, MFIs need to look at long-term perspectives rather than make quick gains. This is important especially once you take funding into consideration as well. Use of certain models like group lending has obviously induced discipline but MFIs do not have a way of obtaining information on the client’s credit behaviour. This brings in the relevance of a credit bureau’s presence in the system. Examples of credit bureaus in certain South American countries and in South Africa were elaborated upon. The use of a good and unique identifier and entities like a National Loans register in South Africa is one good example perhaps on how best to monitor the situation. The credit bureau also needs to realise the importance of informal sources of credit and how it can be brought under its purview.

The conference also emphasized the importance of an MFI in informing people about the loan product and also how these financial institutions need to provide more than just loans. In the case of a health problem or when the need of a medical operation arises, if a product like health insurance is absent, the client in such a scenario will have to rely on loans and hence debt. Hence this calls for further investigation from the MFI’s part in understanding the needs and aspirations of their respective clients. This responsibility should go hand-in-hand with the task of financial education as well. A well-informed client today is always a bright prospect for the future but this does not mean taking the client to a classroom setting. Innovative means and ways of enlightening the client need to be sought after.

One thing that was echoed by all participants was that multiple borrowing or over-indebtedness is not necessarily a bad thing as long as the clients’ in question are able to pay in time. The arguments did include whether MFIs need to reduce the size of loans in order to diffuse the situation. However, this only reinforced the need of credit bureaus and there was also a suggestion for a micro-level credit bureau, the advantage of having such can be seen in the groups of the SHG model. Excessive borrowings would thus come under check as a case of proportionate liability exists. However, a counter-argument to this would be the rise of informal lending and whether this can be monitored so that one knows where the client stands financially speaking.

No matter what direction the sector moves in the future, one thing remains certain for sure – all institutions whether it is a credit bureau or an MFI need to take the client into account before making a decision, the level of consciousness among clients’ needs to be good so that the purpose of a credit bureau becomes meaningful and not merely data assimilation. The sessions that took place at the VC did provoke some interesting thoughts and I hope more of such sessions in the future are translated into positive impacts.