Over-indebtedness in Microfinance: Evidence From a Survey of Borrower Households From an Indian State

Abstract

Based on a household survey of 210 borrowing households from the state of Tamil Nadu, India, we investigate the extent and determinants of over-indebtedness among microfinance borrowers. Our analysis based on logistic regression framework using three distinct measures of over-indebtedness shows that the extent of over-indebtedness among the borrowing households is relatively widespread. As regards the determinants, apart from the demographic factors, external and lender-related factors contribute more towards over-indebtedness rather than borrower-related factors. Within the lender-related factors informal sources of credit exert a much stronger influence on over-indebtedness than formal sources which includes microfinance. The above findings imply that the policy environment should facilitate easier access to formal sources such as microfinance, along with provision of social security schemes with a minimum guaranteed income and insurance coverage.