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The point at
which peer
group pressure
becomes
coercive is an
extremely
difficult one
and along with
other No Easy
Answer
questions is
discussed in
Box 4.2.
However one
clear lesson of
the crisis is
that the policy
of 100-per cent
repayment and
zero tolerance
for default
carried a very
high cost in
terms of client
dissatisfaction,
and provided
ample material
to be exploited
by interested
parties
There was no
doubt some
overlending but
we need
detailed case
studies of how
some borrowers
got into
repayment
difficulties.
This is the kind
of research still
neglected in
India as
elsewhere, and
needs economic
anthropologists
willing to live
in villages for
prolonged
periods and to
use participant
observation and
other methods
to get over the
limitations of
survey-based
research and
"quick and
dirty" studies
APR. This could place new, start-up, MFIs at a disadvantage compared to established large
ones, because the higher rate they need to charge to recover higher initial transactions costs
will become more "visible". The remedy would be to lay down a slab system of suggested
interest rates instead of the uniform rate laid down in the code of conduct at present,
assuming, that is, it is felt it is "politically" necessary to have suggested rates at all. 18
Coercive collection practices
The set of accusations that received the most prominence however related to coercive collection
practices, leading to borrowers having to "abscond", or migrate out of the village, and even
in some cases, allegedly, commit suicide. 19 The Krishna survey respondents felt that (i) joint
liability (the group paying on behalf of the defaulter), (ii) compulsory attendance, (iii) fines
and (iv) keeping all members waiting until repayments are made are the chief means (in that
order of importance) of ensuring a "cent per cent recovery" rate. Means that would generally
be regarded as "abusive" 20 or at least questionable were mentioned by respondents in the
following order of frequency 21 (i) adjusting overdues against the security deposit, (ii) holding
the weekly meeting in front of the defaulter's house, (iii) MFI staff sitting in front of a
defaulters door (iv) offensive language used by group leaders or staff (v) putting up a loan
overdue notice in front of a defaulters house. 22
The point at which peer group pressure becomes coercive is an extremely difficult one and
along with other No Easy Answer questions is discussed in Box 4.2. However one clear lesson
of the crisis is that the policy of 100-per cent repayment and zero tolerance for default carried
a very high cost in terms of client dissatisfaction, and provided ample material to be exploited
by interested parties. Clearly there is a need for flexibility to accommodate cases of extreme
distress in which a borrower is unable to pay because of critical illness, hospitalization etc. A
second lesson is that there is a great need for action research to provide answers to the
question how flexible MFIs can afford to be even in cases of lesser distress (such as failure of
a business) in rescheduling loans, without affecting repayment discipline generally, and how
much operational costs would go up to introduce such flexibility. 23 Third, an additional
response should clearly be much wider use of emergency loans and risk funds. 24
Overlending
The third set of accusations was that MFIs were "dumping money on borrowers" who were
finding it difficult to repay and having to borrow from moneylenders at a higher cost in order
to stay in good standing with the MFI. This is an extremely complicated issue calling for much
further field research and is discussed very briefly in Box 4.2. While the banks are in a position
to lend to salaried borrowers whose total income is relatively easy to assess, MFIs lend almost
entirely to the self-employed whose, relevant income is that of the household as a whole.
There was no doubt some overlending but we need detailed case studies of how some borrowers
got into repayment difficulties. This is the kind of research still neglected in India as elsewhere,
and needs economic anthropologists willing to live in villages for prolonged periods and to
use participant observation and other methods to get over the limitations of survey-based
research and "quick and dirty" studies. 25
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