The microfinance sector has been facing several challenges, particularly around debt distress and over-indebtedness, which are raising concerns among regulators and providers alike. Once envisioned as a tool for poverty alleviation and a bridge to formal finance, microfinance has become a permanent and significant fixture in the financial lives of many borrowers, especially those from low-income backgrounds. These concerns are not new. Before the pandemic, signs of overheating were observed in eastern India, and prior to that, there was a crisis in Andhra Pradesh.
This chapter explores the phenomenon of debt distress from two perspectives. Section 4.2 presents the supply-side view or the provider’s perspective, which is familiar to most industry stakeholders. Therefore, this discussion has been kept short. Section 4.3 focuses on the demand-side view or the borrower’s perspective, which is less well understood. Our primary contribution is to explain this perspective in detail. In section 4.4, we identify solution pathways and make our second key contribution, reframing the problem of debt distress as a cultural phenomenon rather than an economic or technocratic one. Overall, the chapter emphasizes the realities of the sector that create a feedback loop, where lenders are incentivised to over-lend and borrowers to over-borrow, until crisis intervenes as a necessary and often tragic correction.
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