Approaches to Assessing Household Income for Microfinance Clients
By Dwijaraj Bhattacharya, Amulya Neelam, & Deepti George, Dvara Research
Excessive debt negatively affects households and can diminish any developmental gains from such debt. It also dampens a nation’s economic growth and threatens its financial stability. India has had a checkered history of having experienced outbreaks of localised or regional borrower distress. Given that signs of borrower distress are raising their head most recently in the eastern and north-eastern states of India, there is a clear and urgent need for systematic course-correction. The regular off-site reporting formats currently deployed by the RBI for both NBFCs and banks are inadequate to shed light on the health of credit markets. Also, these formats are not able to capture the extent of indebtedness in the population. Thus, in this policy brief, we propose a Framework through which the RBI may simultaneously monitor Indian credit markets and detect the prevalence of over-indebtedness. Initially presented in our earlier report titled “Detecting Over-Indebtedness while Monitoring Credit Markets in India”, the Framework was developed after a study of the literature on the subject, analysis of international best practices, and a study of all RBI-mandated regular off-site reporting formats.
In the Framework, we lay out the indicators that the RBI must capture from all lending institutions. These indicators are designed to provide the RBI with necessary insights into the credit markets at three levels, namely borrower-level, provider-level and market-level. We posit that with appropriate analytical tools, the RBI will be able to ascertain the prevalence of over-indebtedness amidst borrowers. In this policy brief, we also lay down the additional steps that the RBI must take, before operationalising the framework, and for its continued validation. After analysing the priority and ease of operationalisation of the recommendations, we propose a staggered implementation. Spread across four phases, these recommendations may be implemented within two years. Once implemented, the recommendations are expected to help the RBI effectively discharge its mandate of ensuring “systemic stability” and “consumer protection”, especially in light of the uncertainties around debt stress induced by the COVID-19 crisis.
The full policy brief is available here.
