Loan contract information study

CMF Research Associate: Minakshi Ramji, Anvesha Khandelwal, Akhand Tiwari
Partner Organization: Bharatha Swamukti Samsthe (BSS) and SONATA

Project Publication: How do Microfinance Clients Understand their Loans? (November 2008)

The phenomenal growth of the microfinance sector in India has not been without adverse consequences. In 2006, allegations of usurious interest rates and exploitative collection practices against microfinance institutions (MFIs) in the state of Andhra Pradesh lead to a heated face-off between the state government and MFIs; and adverse publicity for the microfinance sector in general in the country. One of the issues raised at the time was whether or not low-income clients with low levels of financial acumen fully understand the details of the loans they are taking. It has been suggested that this lack of awareness leads to over-indebtedness. As such, the perceived lack of financial awareness of clients and its associated deleterious effects, which fall under the broader issue of consumer protection, have become extremely pertinent issues for policymakers.

The Loan Contract Information Study aims to understand how MFI clients understand their loan contract and exactly what it means for an MFI client to be informed. This study goes beyond assessing whether an MFI client knows the terms of his loan. Rather, this study explores which aspects of their loan terms are important to MFI clients and what are the implications thereof for regulation.

This study will be conducted in three phases:
First Phase: To assess how clients understand their loan contracts
Second Phase: To assess how clients compare across hypothetical loan terms
Third Phase: To study clients' perceptions of fairness with respect to different collection practices

See other CMF Related Documents:

Loan Contract Information Study Data [zip 551 KB]