Competition and Multiple Borrowing in the Indian Microfinance Sector

This analysis estimates the extent of multiple borrowing among MFI clients in a competitive state in India. The rapid development of the microfinance sector in India has engendered competition which has positive as well as negative impacts. This has led to concerns over unethical competitive practices, reckless lending by fast growing MFIs without suitable assessment of clients credit absorption capacities and multiple lending leading to over-indebtedness and defaults. Study findings, however, indicate that:

• Multiple borrowers have equal or better repayment records than their single borrowing peers in the same villages;
• Repayment performance does not worsen in more competitive locations for most MFIs suggesting good risk management, monitoring and screening;
• Collective behavior in multiple borrowing is evident.

Study findings suggest that peer, staff monitoring, and informal information sharing about multiple borrowing is prevalent. A credit bureau, however, is required to provide the sector with a sound analytical framework to introduce customized products in terms of features, rates and loan sizes, and to better understand the key drivers of borrowers.