> Posted by Elisabeth Rhyne
Last week CGAP’s Richard Rosenberg posted a question on the Microfinance Blog–what do we mean when we say overindebtedness? Click here to see the original post.
Rich’s definition is philosophically sound but goes deeper than is practical when it defines overindebtedness by whether a borrower is better or worse off. The definition of overindebtedness I like is still rough, but I think it gets at the heart of the problem: “Overindebtedness refers to a state in which a borrower has to make sacrifices to his or her basic standard of living (or, for businesses, productive capacity) in order to repay debts.” Using that definition–which is from the client side, not the provider side–overindebtedness could be temporary or chronic, and it could be the result of “overlending” or of bad luck.
In order to determine whether they are overlending, then, lenders would not worry too much about individual cases of overindebtedness, but about getting a lot of people in trouble. I still think this should show up in the default rate, but given reports coming out about microlenders placing undue pressure on borrowers, maybe this indicator needs to be supplemented by routine client surveys that ask questions like, “In the past month, have you borrowed in order to repay a loan?” and “In the past month, have you gone without meals in order to repay a loan?” We wouldn’t know how to interpret the answers to this, and would expect the answers to be consistently different for different populations, but repeated use of questions like this should reveal trends.
What do you think?