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Multiple lending and borrowingAll competition is fair? Presentation based on initial observations of a study in Kolar By N Srinivasan and ShreyasGopinath
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 55000 • 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