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MFIs: Learning from the
AP Crisis
Box 4.2 Some Not Easy to Answer (NEA) questions calling for further
research and consensus building
What constitutes abusive collection methods
Group lending is built on the foundation of joint and several liability (also referred to as
social collateral, or a collateral substitute) This applies equally to SHGs, where the lender is
not concerned with the identity of the individuals to whom the loan is distributed by the
group, and to smaller Grameen-type groups where loans are recorded in the names of individual
borrowers. Joint liability, although theoretically enforceable in the latter case through the
courts (because other group members sign the necessary documents), is in practice enforceable
only morally through peer group pressure.
The strictly moral component of peer group is the sense of obligation that group members feel
to repay their loans. In India, as in Bangladesh and perhaps elsewhere, poor village women
take the oath they are administered when becoming members extremely seriously. The other
more opportunistic component of peer group pressure derives from the incentive to repay as
the condition for receiving larger loans or continuing to receive credit at all.
The NEA question is, can MFIs rely on these two components alone, and if not what other
methods are ethical There was much talk during the AP crisis of MFIs keeping borrowers
standing in the sun waiting for the last member of the centre to turn up with her loan
payment. A field worker from a rival MFI felt this was unacceptable (as most people would).
But when asked "how about keeping them waiting sitting down, in the shade" she replied:
"Well perhaps, for a while …." In the memorable words of an IIMB professor "you don't recover
loans by smiling at people". However at what point does embarrassing a borrower for keeping
everyone waiting by coming late to a meeting with her repayment, become unacceptable
humiliation
What constitutes over-lending
It is not easy to define the tipping point beyond which a borrower over-borrows. Clearly when
borrowers default involuntarily they have over-borrowed, but not all over-borrowing leads to
default, as when a borrower sells a valuable asset, or cuts back on educational expenses, or is
forced to work when ill in order to meet the next weekly instalment. Group lending leaves it to
the good sense of group leaders to take a call on whether to chip in for a "deserving" defaulter.
But what are the ethical considerations when they are not prepared to put up for a willful
defaulter who then migrates out of the village or worse. Instances of excessive peer group are
not the monopoly of MFIs. There are documented cases of SHG members contemplating suicide,
and it is standard practice in the bishis or informal credit unions of Maharashtra for the entire
membership of perhaps 50 to a 100 people to visit and embarrass a defaulter in her house,
perhaps even restraining her inside temporarily.
When does healthy competition become unhealthy
What constitutes poaching, merely lending to a borrower when she has a loan outstanding to
an existing lender A libertarian in these matters would advocate respecting her freedom of
choice to avail of a larger or more timely loan. Is there an obligation on the new lender not to
lend to her until she has fully repaid her existing lender Or is the lender only obliged to
ensure that she will be able to pay back both loans Is it necessarily irrational to borrow from
a higher cost moneylender for a few days to repay an MFI "Double dipping" is said to be
widely practiced in Bangladesh. What have been the effects
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