The Consultative Group to Assist the Poor has conducted a survey to see how lending practices were different in Andhra Pradesh than in the rest of India. They asked borrowers questions such as if they felt they took on too much debt, were burdend by repayments, and if they had to skip meals to repay. The survey found more yes responses in the town where the crisis took place than in other areas.
From the CGAP Microfinace Blog, writer Karuna Krishnaswamy gives us the conclusions of the study.
It is interesting that despite large incidences of repayment stress, only 2% of the clients in the mass default towns reported that their economic lives had become worse after taking MFI loans. Close to 89% said that their household condition had improved because of increased income generation from business and due to lower interest rates of MFI loans compared to outside options, while 9% reported no change. While we should not draw strong conclusions from these self-reported responses, it provides a perspective in the discussion on how much is too much debt for borrowers.
What can MFIs do?
We find that those who report no repayment stress or regret have an average monthly loan repayment to household income ratio of close to 40%. This is consistent across the five questions. While there is a large variance in the values of this ratio around the mean, the average of 40% may be a useful guiding figure in the Indian context.
Augmenting the loan application form to ask a couple of simple numeracy questions will help identify some high risk clients at low cost. Asking the customer a simple verifiable question such as how much can she repay every week given her stated current monthly income and expenses is easily done. If she gets it wrong, she could offered a smaller loan and monitored more carefully. This further implicitly places more responsibility on the customer to borrow responsibly.