> Posted by Elisabeth Rhyne
Last week CGAP’s Richard Rosenberg posted a question on the Microfinance Blog–what do we mean when we say overindebtedness? Click here to see the original post.
Rich’s definition is philosophically sound but goes deeper than is practical when it defines overindebtedness by whether a borrower is better or worse off. The definition of overindebtedness I like is still rough, but I think it gets at the heart of the problem: “Overindebtedness refers to a state in which a borrower has to make sacrifices to his or her basic standard of living (or, for businesses, productive capacity) in order to repay debts.” Using that definition–which is from the client side, not the provider side–overindebtedness could be temporary or chronic, and it could be the result of “overlending” or of bad luck.
In order to determine whether they are overlending, then, lenders would not worry too much about individual cases of overindebtedness, but about getting a lot of people in trouble. I still think this should show up in the default rate, but given reports coming out about microlenders placing undue pressure on borrowers, maybe this indicator needs to be supplemented by routine client surveys that ask questions like, “In the past month, have you borrowed in order to repay a loan?” and “In the past month, have you gone without meals in order to repay a loan?” We wouldn’t know how to interpret the answers to this, and would expect the answers to be consistently different for different populations, but repeated use of questions like this should reveal trends.
What do you think?
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May 5, 2010 at 10:49 am
Richard Rosenberg
Beth — Defining overindebtedness in terms of clients being worse off may or may not make conceptual sense, but I agree with you that it would never be a practical measuring rod for general use. (I’ll discuss this in future postings on this topic.)
I like your suggestion about focusing not so much on individual cases but rather on whether we’re getting a lot of people in trouble. Like you, I think that in most cases this would probably show up sooner or later in the default rate; but also like you, I entertain some worries about how reliable this assumption is. In fact, my most pressing question (as yet unanswered) is how one could test the usefulness of delinquency/default as a trailing-indicator proxy for the effects on borrowers that we want to avoid.
Portfolios of the Poor suggests to me that paying off one loan with proceeds of another may be standard operating procedure for many households, and not a strong indicator that basic consumption is being hurt. As to going without a meal, suppose that we learned that a lot of food-insecure clients were successfully using microcredit to avoid going hungry for extended periods, and that they occasionally had to skip a meal or two to make payments. I’d hesitate to tag this as “overindebtedness,” because that term suggests something bad that we don’t happening to very many borrowers.
Notwithstanding my quibbles about the two questions you suggested, your definition (basic consumption being hurt) may well have merit as something that can be tested practically. Even if such testing turned out to be complicated and expensive, we might be able to establish how well damage to basic consumption correlates with more easily measurable proxies.
In or phone conversation yesterday you suggested that it may be useful to de-link the notion of overindebtedness from the notion that the lender has done something wrong. By this token, if we find that a lot of borrowers are making substantial sacrifices in their basic standard of living, we’d know that there was a serious problem we needed to investigate, but we couldn’t automatically conclude that the cause was imprudent lending, as opposed (for instance) to an unpredictable external economic shock that hit a lot of the borrowers at once.
In terms of a viable research strategy, I suspect there is more light at the end of the tunnel with your approach than with mine.
Thanks
Rich