Paper
How do Microfinance Clients Understand their Loans?
Clients' understanding of loan terms and its implications for regulation
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37 pages
This paper explains how MFI clients perceive their loan contract and its implications for policy. In recent years, discussions on microfinance policy in India have centered on the extent to which small borrowers understand their loans and the financial liability implicated therein.
Lack of financial awareness can lead to indebtedness and greater vulnerability for clients. Study findings indicate that:
- Small borrowers are able to identify the size and duration of the loan, and their weekly installment payable on the loan;
- They know very little about the interest rate and total interest expense they incur on the loan;
- Most clients find coercive collection practices acceptable;
- Clients think about their loans in terms of what they owe on a weekly basis;
- Top-down regulation that assumes that borrowers can calculate and understand their interest rates would not succeed in protecting small borrowers.
Training which promotes various aspects of financial literacy like budgeting, understanding of financial rights and debt is important to protect the small borrower. However, financial literacy training not only involves change in level of knowledge about financial products but also behavioral change.
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