Multiple lending and borrowing All competition is fair?

1
Multiple lending and borrowingAll competition is
fair?

• Presentation based on initial observations of a
  study in Kolar
• By N Srinivasan and Shreyas Gopinath

2
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

3
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 customers liability not
  well analysed
• Limitations of JLG mode not recognised

4
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

5
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

6
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

7
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

8
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 lenders liability induces unfair
  competition
• Competition code needed

9
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

10
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

11
Thanks