Determinants of overindebtedness among microfinance borrowers: a poverty line-based approach

Borrower overindebtedness is a serious issue faced by the microfinance industry globally. In that regard, the purpose of the present article is to identify the extent and determinants of borrower overindebtedness among microfinance borrowers. For this study, the concept of overindebtedness is approached with the help of a scientifically estimated poverty line level of income by a government agency, and then the results are compared with the World Bank recommended poverty line of $1.90 per capita per day. A quantitative methodology is followed using a survey design covering 210 borrowing households in two districts from the state of Tamil Nadu in India. The findings of the study indicate that approximately 57 per cent of the sample respondents are overindebted. Results of the binomial logistic regression show that adverse economic shocks, low household income, number of credit arrangements contracted by the household and quantum of borrowing from informal sources increase the likelihood of a household being overindebted. Comparison with the World Bank recommended poverty line shows large similarities. Accordingly, the study points to the need to prioritize income generation schemes rather than credit distribution schemes as an instrument of social policy.