Too much microcredit? A survey of the evidence on over-indebtedness

Abstract

Microcredit has long had an enviable repayment record; levels of delinquency and default have been very low. But more recently, collection problems have appeared in some major markets. In a review of four countries, Chen, Rasmussen, and Reille (2010) reported that delinquent loans, which averaged 2 percent of portfolio in 2004, skyrocketed to 2009 levels of 7 percent in Bosnia-Herzogovina, 10 percent in Morocco, 12 percent in Nicaragua, and 13 percent in Pakistan. In some of these countries, subsequent levels have risen quite a bit higher. More recently, collection has collapsed in the Indian state of Andhra Pradesh. The objective should be to reduce the prevalence of over-indebtedness to reasonable levels. Complete elimination of over-indebtedness is not a practical goal: the only way to accomplish this would be to drastically restrict access to microloans. Many measures to reduce over-indebtedness can have some degree of negative impact on borrower access and cost. For instance, tightening credit standards will lower over-indebtedness, but it will also prevent some loans to borrowers who would have had no difficulty repaying. Careful balancing is needed.