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Over-indebtedness and Its Drivers among Microfinance Borrowers in India
In microfinance markets worldwide, over-indebtedness among borrowers and households has emerged as an important concern. Over-indebtedness, measured in terms of sacrifices made by households, is high in both rural and urban India. Factors statistically significant in explaining over-indebtedness are the borrower’s age and financial literacy; the household’s entrepreneurial activity, income level, and spatial location; and the proportion of dependent members in a household.
The authors express their sincere thanks to the anonymous referee for constructive comments and suggestions, which helped in improving the quality of the paper significantly. An earlier version of this paper was presented on 19 January 2018 at the Institute for Financial Management and Research, Sri City Campus, Chittoor District, Andhra Pradesh. The authors are grateful to the participants for their valuable comments.
Microfinance or microcredit represents small loans made to the weaker sections of the population to help them improve their livelihood. Microfinance institutions (MFIs) engaged in providing these loans have been able to challenge the traditional banking system by using the concepts of joint liability and group lending. Over the years, microfinance programmes have emerged as an important factor in reducing poverty and bringing about social change.
In India, the movement took shape when the National Bank for Agriculture and Rural Development (NABARD) took up a pilot project, along with some non-governmental organisations (NGOs), of formally linking self-help groups (SHGs) with banks for meeting the credit requirements of poor households in rural India. The high demand for such microcredit propelled many different types of organisations into the sector, including non-banking financial companies (NBFCs). These organisations started with the genuine objective of helping the poor and low-income people but, over time, they started drifting from their social objective and became linked to mainstream finance, and their focus shifted from social goals to other organisational goals such as higher profitability, repayment rates, and market share. It resulted in aggressive lending and undesirable recovery practices in the market, which affected daily livelihood, social networks, and the dignity and self-worth of poor households (Hulme and Maitrot 2014).
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