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 makes two important contributions.
The first is to present measures of debt distress from the borrower’s perspective, which is a perspective that does not receive the careful attention that it deserves, from either policymakers or industry stakeholders. The chapter argues that in measuring debt distress from the borrower’s perspective, the difficulty of deciding whether the borrower has intentionally invited distress upon themselves or not, necessitates a multidimensional approach to the measurement problem. Some actual data is presented from one such multidimensional exercise.
The second contribution is to reframe debt distress as a cultural problem rather than a purely economic or purely technocratic one. The cultural framing exposes and implicates perverse cultures on both sides of the market. The chapter describes each of these cultures, and shows how the culture on each side accentuates and amplifies the culture on the other side. This produces a mutually reinforcing vicious cycle of over-lending on the lender’s side and loan churning on the borrower’s side. With time, the problem only worsens until crisis intervenes as a necessary and often tragic correction.
Read the full chapter here.
