Why do Microfinance Clients Take Multiple Loans?

Examining the trend of multiple borrowings by MFI clients
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This note presents the rationale for multiple borrowings and their impact from a client perspective. It discusses how MFIs perceive the issue and its implications.

The rapid growth and commercialization of the microfinance sector in India has increased competition among MFIs for clients. This has resulted in more than one MFI operating in an area and clients borrowing from multiple sources, often leading to over indebtedness. From a client perspective, there are a number of reasons for taking multiple loans, including:

  • Receiving inadequate loans for business expansion;
  • Repaying existing loans with money lenders, MFIs and SHGs;
  • Borrowing to meet requirements such as marriage, funeral, house construction and health;
  • On-lending to neighbours or friends;
  • Purchasing jewellery to create savings;
  • Unexpected receipt of loans from banks or government.

It is difficult to attribute multiple borrowings to unmet demand for credit alone, or to MFIs dumping loans on clients. MFIs can, however, reduce the incidence of multiple borrowing by improving the appropriateness of disbursement timing, implementing individual cash flow-based lending, initiating state-level MFI forums and sharing data about delinquent clients and areas of multiple loans.