Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in India: An In-depth Investigation of Saturated Areas

This study examines the nature and level of over-indebtedness among microfinance clients in selected cities of India, through measures of overindebtedness. 

Background
In the past few years, India has become a predominant player in the microfinance sector in the sub-continent. While the sector has recorded phenomenal growth in recent years, incidences of over-indebtedness (OID) are being reported in various parts of the country as well. The study aimed to provide a comprehensive understanding of the problem of over-indebtedness and its extent in the selected areas of Allahabad (Uttar Pradesh), Indore (Madhya Pradesh) and Mysore (Karnataka).

Approach

The level of indebtedness was estimated through a Net Indebtedness Index. The indebtedness level of borrowers was classified as follows:  
1. Not over-indebted (index of indebtedness <0.40): household borrowers who spend less than 40% of monthly net incomes, or profit after taxes in case of enterprises, on the payment of monthly credit installments.
2. At risk (index of indebtedness = 0.40 – 0.75): household borrowers who spend 50% to 75% of monthly net incomes or profit in the payment of monthly credit installments.
3. At critical phase (index of indebtedness = 0.75 – 1.0): household borrowers who spend 75% to 100% of net monthly income or profit in the payment of monthly credit installments.
4. Insolvent (index of indebtedness > 1.0): household borrowers who spend all monthly net incomes or profit in the payment of monthly credit installments; monthly installments exceed the value of their net incomes.

Key Findings

The varied scales of analysis used in the three districts identified which have the largest proportion of “borrowers servicing more than three MFI loans”, provided an opportunity for thorough assessment of where the problem of OID lies. Multiple borrowings, high debt-service burden, discrepancy between stated purpose and actual usage of loans, inflexibility in repayment schedules as perceived by the respondents, and pipeline loaning were some of the major factors linked to their indebtedness levels. The fundamental problem lay in the debt-income ratio of over-indebted households, which resulted in high levels of repayment anxiety and often pushed borrowers to resort to cross-borrowing. This trend was found to be more prevalent among low and unstable income groups, particularly households that relied on agricultural and wage-based occupations.

Implications

The findings of the study have important implications for credit policies and programmes that increasingly focus on access and saturation. There is a need for more focused, customized approach to credit access, basis on the needs of the individual borrower. 

Thematic area

Financial Inclusion

Project Leads

Shambhavi Srivastava, Sakshi Mohan

Location

Uttar Pradesh, Madhya Pradesh, Karnataka

Partners

Access Development Services, SIDBI

Status

Completed