Multiple Borrowing – Increasing Credit Risk for MFIs

Microfinance institutions in Pakistan are switching from a single to a multiple borrowing relationships which increases credit risks with creating lot of challenges and opportunities for the sector. So we need to understand first that what is multiple borrowing? Whether it is multiple loans from one or different institutions, one type or different types of institutions, multiple borrowing from informal sources or multiple loans from all types of borrowing. Is this a bad thing?

According to Ms. Veena Yamini Annadanam a Senior Analyst in MicroSave’s Social Performance Management (SPM) practice group “multiple borrowing is clients borrowing from different types of lenders, simultaneously, to meet their diverse needs”. A customer borrowing from different formal and informal microfinance providers as many as he/she can possibly repay. The point is why customers use multiple borrowing option? They desire more loans to fulfill their needs, interest rates matters? Personal consumption purpose? Some customer goes for product line? And the last and most concerning reason is to pay his/her first loan they approach for multiple loan?

Multiple loans is not bad itself if take out to fulfill business needs/emergency but when it borrow to pay first loan it increases the credit risk of MFIs. According to Microfinance Banana Skins Report 2011, credit risk is the biggest and second fastest risk intimidating to the microfinance sector. This banana report was although based on perceptions but in actual we observed increasing overdue trends in Pakistan and once which 0% was, now increasing and reached to 1.5% as of third quarter of 2017. 

Study reveals that in recent years Concerns have been raised about the effectiveness of microfinance in alleviating poverty, multiple loaning and over-indebtedness is considered one of the evidences of it failure. Many indications observed in Pakistan that have shown that multiple borrowing have used to repay previous loans, and thereby have made them over-indebted. One other side MFIs rapid growth due to commercialization of sector, disregard of MF lending principles and competition in microfinance institutions leading to saturation is also a major reason of multiple lending and increasing credit risk in Pakistan.

To meet this challenge MFIs needs to review and redefine their credit policies, it should be clearly covered it’s all objectives, easy to understandable for lower staff, and train employees on how the credit policies in different situations deal with different procedures and processes. It should clearly discourage over-indebtedness with focusing on reducing credit risk. Therefore they should consider the 5Cs while screening clients for loans, these include collateral (Refer to credit policy), capacity, capital, character and conditions.