Is more credit always good credit?
by Christoph Kneiding : Monday, December 8, 2008
Casual empirical evidence suggests that borrowers who take loans from more than one MFI are more likely to default on their loans. Here is a graph that researchers from BRAC, one of Bangladesh’s largest MFIs, have produced based on client data in the district of Tangail. While 9 out of 10 BRAC-only clients repay their loans regularly, repayment drops to 50% for households with membership in three or more MFIs other than BRAC (we should add, though, that this finding is not representative for the whole industry, and other experiences are reported elsewhere). What are we observing here? Rising competition of MFIs that leads to a lack of repayment discipline? Or is it due to the effects of over-indebtedness caused by multiple loans from different institutions?
Because there’s no credit bureau, defaulting on a loan does not entail major negative consequences for the borrower. She might not receive further loans from this specific MFI, but competitors that are uninformed about her negative credit history might be willing to approve a loan. In many places, gone are the days when MFIs could count on being the only microlender in the neighborhood. The CEO of a major Bangladeshi MFI guesses that virtually all of his active borrowers also have concurrent loans with other MFIs, often several others.
Alternatively, maybe we are observing clients being overstrained in their repayment capacity by several loans. Practitioners and researchers alike show a growing interest in this topic, although definitions of “over-indebtedness” are at best vague. At the moment, we don’t see a good way to get reliable answers without doing expensive and time-consuming randomized impact studies. The hope would be that such studies could test the power of more easily-measured proxies, like repayment rates or clients’ reports of whether they’re experiencing stress from the loan. Is there anyone out there willing and able to do such studies?
December 12th, 2008 at 10:33 am, Alejandro Ponce ()
Hi. It is not clear whether people with more cards repay less than people with only one credit card. It depends a lot on the reasons for getting one or various cards. Some people have only one card because they are not creditworthy and struggle to get another one. Some others have one by choice. Similarly, there are people getting multiple credit cards in order to improve their credit scores and get access to better loans afterwards. I think the key is to evaluate whether people with several credit cards actually know how to manage them. To me, it is not clear whether this is the case, particularly in environments of increasing lending wherein banks grant credit cards easily to gain market share. In these situations, consumers getting several cards quickly could turn delinquent more often than consumers with fewer cards. In my Ph.D. dissertation, I did a little bit of analysis on this.
7 Comments
December 9th, 2008 at 6:44 am, Longyao Zhang ()
Hi.I’m interested in your topic which also pulzzed me. When reading your short comment,I’m thinking that whether we can got some inspiration form credit card market? In cities of China, credit cards gradually become popular in people’s life especially some young guy. Some people have several credit cards simultaneously. Whether we can do some comparative analysis of repayment between people have one card and more than one card from different banks?
Hope for your reply and further communication.
Zhang Longyao From Nanjing Agricultural University ,Nanjing, China.