Risks in multiple micro borrowings

Written By: Akram Khatoon

Almost all microfinance institutions and banks are piling up non-performing loans because of depressed economic conditions, rising inflation and growing trend towards multiple borrowings by clients.

The prudential regulations make it mandatory for the prospective borrower to declare existing borrowings as the requested limit for the new loan has to be within the prescribed total loan liability of a person.

The presence of multiple microcredit providers, who do not come under the purview of microfinance prudential regulation prompts borrowers to borrow from more than one institution. Normally field staff of microfinance institutions (MFIs), microfinance banks (MFBs) and NGOs operating in the same market segment, are booking maximum number of loans to achieve the set target.

On the other hand, persistent downturn in overall economic growth and steep rise in cost of living as well as cost of doing business has forced small borrowers to avail additional loans beyond prescribed maximum limit from micro finance providers in their area. A survey by the Consultative Group to Assist Poor (CGAP) a World Bank`s Research entity—- revealed that incidence of multiple borrowings is high in big cities like Karachi, Lahore, Islamabad and Hyderabad where new businesses have better marketing opportunities for their products and at the same time they need consumption loans to cope with steep rise in food prices, transport cost, rising education and health care expenses needed for family members.

This tendency towards multiple borrowings in the face of falling purchasing power of borrowers entangles them in whirlpool of non-performing loans. The survey also revealed that multiple borrowing cases can be detected in area of group lending where activities of each borrower are known to all other group members.

Findings show that two of each five borrowers in these big cities like Rawalpindi, Lahore and Karachi were involved in multiple borrowing also because of substantial increase in cost of production and marketing of products including raw material, high electricity and gas tariffs.

Depressed economic growth and substantial fall in purchasing power of all segments of society impacted adversely on marketing of small businesses products. Delayed marketing of micro business products slows down the cash conversion cycle (from the stage when investments are made till products come out and sold in the market) as such borrowers resort to additional borrowings that normally becomes unmanageable for them and a break-down occurs in their repayment cycle, resulting in non-performing loans.

Sometimes borrowers are prompted to borrow from more than one micro lending agency just to adjust/repay loan of an MFI or MFB, when it becomes overdue for repayment. This phenomenon is common in emerging economies, particularly India, where in certain provinces like Andhra Pradesh, micro-financing industry is in distress mainly due to very high interest rate charged and unethical strategies applied for loan recovery from micro borrowers, compelling clients to resort to multiple borrowing. Accordingly, central bank of India has placed cap on interest rate to be charged from small borrowers.

Multiple borrowings are common with self-help group (SHG) mode of financing, where number of borrowers exceeding 20 form a group and collect savings, which they utilise for financing business and consumption needs of group borrowers by charging above market rate interest in view of high transaction cost involved and also because of fast cash conversion cycle of micro businesses financed.

Multiple borrowings are on increase in micro finance sector due to existence of such MFIs and SHGs from where loans are easily available to clients of micro finance banks.

Increasing competition among various lenders results in disbursing loans even to such delinquent micro borrowers having outstanding loans with micro finance banks. In Bangladesh where micro financing flourished with leaps and bounds, there are evidences of recycling of micro loans by Grameen Bank and other MFIs just to display high rate of recovery.

A survey conducted in 2007 by Krishna Swamy, an eminent economist, revealed that 27 per cent of multiple borrowings by micro borrowers were used for repaying loans of other MFIs and SHGs and to smoothen business cash flows. `Big` enough loans to meet requirements of growing micro businesses are preferred by borrowers despite comparatively higher rate of mark up which is less than higher transaction cost involved in borrowing from more than one source.

Incidents of multiple borrowings occur when a borrower moves to conventional banks for higher credit limit to manage a sustainable growth in business for which the lenders assess the borrower on their own risk parameters. The borrower, in case of his failure to get additional loan from a conventional bank, either borrows from an NGO/MFI or abandons the idea of business expansion altogether.

In fact, multiple borrowing has become a growing trend in micro finance sector all over the globe. Now it will not be wrong to say that loan repayment surety to some extent depends on borrower`s ability to raise a new loan to repay the prior loan / loans. If a client is provided with the right size loan, it could curb the potential debt delinquency.

As such, microfinance sector as a whole needs to strike a balance between maximum loan size, lending risk and an average loan giving agency capacity to meet needs of micro businesses and get rid of multiple borrowings.

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