Effects of multiple borrowings on overall indebtedness of MFI clients

The Indian microfinance sector has witnessed rapid growth during the past few years. Several new MFIs have come up, and older ones have expanded their operations geographically. There exist pockets in various states where there is a concentration of many MFIs. On the one hand competition has helped in bringing interest rates down, on the other hand there are concerns relating to overlap in clients resulting in clients borrowing from multiple MFIs and beyond their repayment capacity.

While expert opinion cautions against the adverse impacts of multiple borrowings by the clients, empirical evidence collected so far, does not establish that the recovery rates of MFIs deteriorate as a result of their clients borrowing from multiple sources. Intense competition among MFIs may lead to instances of multiple borrowings by MFI clients and clients may be tempted to enter into a situation of over indebtedness (Graham Wright). It may also lead to asymmetric information and borrowers may obtain multiple loans, which in the longer run would militate against provision of sustainable financial services (McIntosh and Wydick, 2005). However, an empirical study of the partnership clients of ICICI bank concludes that multiple borrowers have equal or better repayment records than their single borrowing peers in the same village (Krishnaswamy, 2007). The Bolivian experience in microfinance in the early years of this decade provides an example of the ill-effects of over indebtedness among microfinance clients (Rhyne). The microfinance experience was symptomatic of the problems in the macro- economy which resulted in reduced purchasing power overall.

The existing literature provides a divided view on the impact of multiple borrowings by MFI clients. A priori it does appear that while multiple borrowings may not be a problem on its own, if it leads to clients borrowing beyond their repayment capacities, problems arise. Also in case there are external shocks, client’s borrowing capacity may go down, and multiple borrowings increases the chance that the client is over-indebted.