Multiple lending and borrowing All competition is fair? Presentation based on initial observations of a study in Kolar By N Srinivasan and Shreyas Gopinath

Kolar problem Concerted action by customers resulting in significant default Proximate reason not an adequate explanation of what happened Debt induced stress seems a more likely cause Multiple loans led to either excessive debt or excessive loan service load Guarantee obligations also multiplied, aggravating the stress

What went wrong Too many MFIs in a small geography Wooing same customers – even when other MFIs were present Loan servicing capacity and repayment ability have not been assessed – neither processes nor incentives required this Information of extent of customer’s liability not well analysed Limitations of JLG mode not recognised

Was there multiple lending/borrowing A local study of 200 borrowers by a MFI indicated that 25% had more than 6 loans Typically each customer had 3 loans Field study by Shreyas shows that of 45 customers – More than 50% had multiple loans – Average loan Rs 23800; four times state average – max loan Rs – Loan servicing capacity low

Multiple borrowing Present loan size inadequate for many customers Easy availability in competitive geographies provides the opportunity After the second loan serial borrowing could become a habit in some customers Need determines the initial loans; easy availability fuels excessive borrowing

When multiples become a problem Loans could become excessive and beyond repaying capacity Multiple loans result in a higher weekly/monthly servicing load In group mode, guarantee liability increases exponentially Renders group members’ position risky Extinguishment of aspirations – erosion of loan discipline

Multiple lending Several MFIs lending to the same borrower per se is not risky Competitive lending to same clients could lower financial disciplines Inadequate information on full extent of customers’ liability renders credit decisions risky Group guarantees lose value as collateral substitute when customers take multiple loans in different groups

Competition Competition at most times improves efficiency and quality of service to customers Negative effects seen in erosion of disciplines Inappropriate staff behaviour Lack of lender’s liability induces unfair competition Competition code needed

Information sharing Competition suppresses critical information Feigned ignorance at the root of excessive lending and debt to same customers Staff level information exchange for private benefit Information on borrower status not shared; sharing not encouraged MFIs in Kolar have now started sharing of information – but more of the negative variety Need to focus on positive information sharing

What to do A critical look at internal processes Redesign of the loan products Refinement of staff incentives Greater encouragement to understanding the customer and her financial behaviour Prioritisation of information sharing – both negative and positive Fair competition code is a vital requirement

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