Over-Borrowing and Competition: Are Credit Bureaus the Solution?
This article discusses competition between MFIs, and multiple borrowing by microfinance clients in India.
The microfinance industry in India has grown rapidly and is characterized by increasing competition among MFIs. The article draws upon findings of a study on competition and multiple borrowing conducted by the Centre for Micro Finance (CMF), Chennai, India. The study examined the extent of competition and its consequences for the borrower, lender and the industry as a whole. Study findings include:
- No negative relationship observed to exist between multiple borrowing and repayment performance;
- MFIs were, by and large, managing risk well in the face of competition;
- No strong evidence observed to indicate that new MFIs use larger loan sizes as a client poaching tool;
- None of the multiple borrowers interviewed had been poached by an MFI.
The study found no evidence to justify a credit bureau for the sector, at this point, with loan officer and peer monitoring being cheaper and more effective. A credit bureau, however, can view clients past credit histories and help MFIs in targeting different client groups with customized products, and improving loan approval times and efficiency.