Independent Research and Policy Advocacy

Identification & Alleviation of Over-indebtedness: Introducing the Debt Distress Protocols Project

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Debt distress or over-indebtedness can be identified through quantitative indicators such as the level of delinquency faced by the borrower. However, distress may manifest before or even without the occurrence of defaults. Qualitative research on household experiences with debt shows that borrowers engage in varied coping mechanisms to repay loans which may range from mild strategies to extreme sacrifices that indicate the presence of distress. Households may pull children out of school, postpone medical care, or sacrifice other such crucial aspects to reconcile their inability to make repayments with their high debt burden. Low-income households are more likely to engage in such sacrifices since they may fear exclusion from debt markets. This fear is often underscored due to the demand-supply mismatch. There exists a very large pool of (currently unserved) borrowers that providers can turn to due to the high demand for loans and their commercial necessities, invariably excluding the current borrowers from the debt market. The issue is further magnified due to the regulatory design surrounding credit decisioning and its implementation.

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