Microfinance, Indebtedness and Microfinance, Indebtedness and OverindebtednessOverindebtedness

Isabelle Guérin, Isabelle Guérin, Institute of Research for Development, Provence University (France)Institute of Research for Development, Provence University (France)French Institute of Pondicherry (India)French Institute of Pondicherry (India)Head of the Research programme RUMEHead of the Research programme RUMEAssociate Researcher to CERMI - Solvay Business SchoolAssociate Researcher to CERMI - Solvay Business School

Problem to be addressed:

• Microfinance is usually considered an efficient tool for reducing the vulnerability of poor people and helping them to protect against risk ahead of time.

• But little attention has been paid to the

risks of microfinance for the clients, especially financial fragility and over-indebtedness.

Research objectivesResearch objectives

To analyze the effects of microfinance on To analyze the effects of microfinance on indebtedness and over-indebtedness in a indebtedness and over-indebtedness in a context (Tamil Nadu, rural south-India) where: context (Tamil Nadu, rural south-India) where: Rural households are already highly indebted (before Rural households are already highly indebted (before

microfinance) microfinance) There is an active policy of financial inclusion and There is an active policy of financial inclusion and

uneven growth of microfinance supply uneven growth of microfinance supply annual growth of 40% in volume and 80% in clientsannual growth of 40% in volume and 80% in clients

Microcredits are mainly used for « non productive » Microcredits are mainly used for « non productive » purposes (between 60 and 80%)purposes (between 60 and 80%)

mainly health, education, repayment of previous debt, mainly health, education, repayment of previous debt, ceremonies ceremonies

Methodology

A combination of quantitative and A combination of quantitative and qualitative analysisqualitative analysis in three Districts of in three Districts of South Rural IndiaSouth Rural India

In-depth analysis of indebtedness In-depth analysis of indebtedness practices practices

Around 1000 households – clients and non Around 1000 households – clients and non clientsclients30 villages - diversity of socioeconomic 30 villages - diversity of socioeconomic contexts contexts

Longitudinal analysis (400 clients): 2004 – Longitudinal analysis (400 clients): 2004 – 20062006

Individual interviews with clients and Individual interviews with clients and household members, moneylenders;household members, moneylenders;

Village and local financial markets Village and local financial markets monographs monographs

Specific attention is given to the quality and Specific attention is given to the quality and reliability of data: reliability of data: Debt as a taboo subject requires trust, confidence and Debt as a taboo subject requires trust, confidence and

time time The huge diversity of terminologies requires good The huge diversity of terminologies requires good

knowledge of local contextsknowledge of local contexts There are distinctive gender financial responsibilities There are distinctive gender financial responsibilities

within the household (requires interviews with men within the household (requires interviews with men andand women) women)

Qualitative analysis as a key component Qualitative analysis as a key component Data collection: Data collection:

a good konwledge of local contexts is the only way to collect a good konwledge of local contexts is the only way to collect reliable data reliable data help to raise relevant research questionshelp to raise relevant research questions

AnalysisAnalysisNon linear chain of impact Non linear chain of impact Qualitative approach and rigor are not incompatible ! There Qualitative approach and rigor are not incompatible ! There are also criteria of scientific validity:are also criteria of scientific validity:

ContextualizationContextualization TriangulationTriangulation

Main Sources of IncomeMain Sources of Income

Most households are Most households are involved in involved in agricultureagriculture

But non farm But non farm occupations are a occupations are a growing source of growing source of income income

Self-employment in Self-employment in the non farm sector is the non farm sector is limited (10-20%)limited (10-20%)

Main Occupations

Agriculture (Daily

labourers)39%

Agriculture (producers)

8%

Non Farm Sector

(Permanent Job)15%

Non Farm Sector (Casual

Labour)19%

Non Farm Sector (Self

employment)14%

Other 5%

Result 1: the burden of debt (before Result 1: the burden of debt (before microfinance)microfinance)

Official Data (NSSO)Official Data (NSSO) Own DataOwn Data

% Households % Households IndebtedIndebted

20%20% 80-90%80-90%

Average OustandingAverage Oustanding 4000 INR4000 INR 15000 - 30000 INR15000 - 30000 INR

(approximately one (approximately one year of household year of household income)income)

Huge diversity of borrowing sources : Huge diversity of borrowing sources : tandalstandals (mobile (mobile moneylenders), moneylenders), terinjavangaterinjavanga (known persons), professional (known persons), professional moneylenders, pawnbrokers, relatives and friendsmoneylenders, pawnbrokers, relatives and friends

Result 2Result 2

Increase of global Increase of global indebtedness (+ indebtedness (+ 30%) 30%) Debt reorganisation Debt reorganisation (reduction of the (reduction of the share of private share of private moneylenders, moneylenders, increase of the share increase of the share of pawnbrokers and of pawnbrokers and microfinance) microfinance) Increased variety Increased variety borrowing sourcesborrowing sources

0

2000

4000

6000

8000

10000

12000

14000

16000

2004 2006

Avera

ge O

usta

nd

ing

per

Ho

useh

old

(IN

R)

Microfinance

Relatives and friends

Pawnbrokers

Private money Lenders(mobile moneylenders,professionalmoneylenders, "knownpersons")

Employers

Diversity of trajectoriesDiversity of trajectories

Type 1: « Careful Management » (20% of Type 1: « Careful Management » (20% of clients): clients): Limited oustanding debt (<5000 INR) Limited oustanding debt (<5000 INR) Limited use of microfinance Limited use of microfinance

Type 2: « Debt reduction » (30% of clients) Type 2: « Debt reduction » (30% of clients) Mainly due to life cycle evolutionMainly due to life cycle evolution Impact of microfinance: mainly Impact of microfinance: mainly substitutionsubstitution for for

informal finance informal finance But there are ceiling effects : But there are ceiling effects :

the comparative advantages of microfinance (self-help-the comparative advantages of microfinance (self-help-group) are limited in comparison to informal finance group) are limited in comparison to informal finance amount, flexibility, lack of discretion, excessive moral amount, flexibility, lack of discretion, excessive moral pressurepressure

The clients’ perspective (1)The clients’ perspective (1)

flexibility 34%

cost 26%

discretion 17%

other 23%

• Good quality of financial services means…Good quality of financial services means…

Type 3: « Rising Indebtedness » (50% of clients)Type 3: « Rising Indebtedness » (50% of clients) Main factors: life cycle events (ceremonies, health, Main factors: life cycle events (ceremonies, health,

death) but also incitement to consumptiondeath) but also incitement to consumption Microfinance impact: Microfinance impact:

leverage effect (better creditworthiness) leverage effect (better creditworthiness)

juggling practicesjuggling practices Risks of over-indebtedness since microfinance acts Risks of over-indebtedness since microfinance acts

mainly on « revealed » creditworthiness but not on mainly on « revealed » creditworthiness but not on « core » creditworthiness « core » creditworthiness

Microcredit 20.000 Rs

Pledging

10.000 Rs« Well-known

person »

Marriage50.000Rs

Reimbursement

Microcredit 5000 Rs

10.000 Rs« Well-known

person »

Monthly Instalment

Income

Reimbursement

10.000 RsRelatives

« Well-known person »30.000 Rs

Monthly Instalment

Interest

Pledging

Capital

Reimbursement

Implications and conclusionsImplications and conclusions

« Financial dualism » does not work as a theory : « Financial dualism » does not work as a theory : there is great overlap between formal and informal finance there is great overlap between formal and informal finance

rather than opposition and substitution rather than opposition and substitution

Risks of over-indebtedness reinforce the need for the Risks of over-indebtedness reinforce the need for the improved protection of microfinance consumersimproved protection of microfinance consumers

checking income and pre-existing debt before providing checking income and pre-existing debt before providing microcreditmicrocredit

The diversity of clients (not only in terms of poverty The diversity of clients (not only in terms of poverty level but also in terms of propensity to go into debt and level but also in terms of propensity to go into debt and position in life cycle) calls for a diversity of services position in life cycle) calls for a diversity of services