Examining the adequacy of MFI multiple lending directive in India: A study of slum-dwellers’ loan related choices


By Kanish Debnath and Priyanka Roy, Indian Institute of Management – Ahmedabad


The Indian Financial Inclusion efforts have been quite paradoxical. While a significant number of households in the country are yet to have access to formal credit, many parts of the country have already experienced crises of over-borrowing resulting in huge defaults. Further, though Indian financial inclusion experts have received multiple setbacks in their efforts to push credit into low-income households, their pursuit has remained relentless. With multiple credit agencies often competing in the same geographical area, over-borrowing and even ghost borrowing has become rampant. In order to put a plug on the rising Non-Performing Assets, the Reserve Bank of India (RBI) issued new directives for all Non Banking Financial Companies in December 2011 with further modifications in August 2012, restricting the borrower’s freedom in a bid to control over-indebtedness. However, we reason that restraining borrowers to borrow only from two MFIs or less, will create further problems for both borrowers and MFIs. In a market of illiteracy and informational asymmetries, people with a tendency to cheat can still defect, households may be denied loans at the time of need and rogue MFIs may pre-empt members from other MFIs. We therefore study the borrowing behaviour of slum-dwelling households in the city of Pune to gauge the adequacy of the RBI directives in containing over-borrowing. Through a logit model, we find that household characteristics do predict over-borrowing behaviour but only to moderate levels. Since monitoring of loans to poor households is infeasible, we suggest that RBI suitably amend these restrictions to better promote free and fair competition between MFIs.

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