Monday, May 4, 2009

Moral hazard in microfinance

Andhra Pradesh has been a shining example of the Self Help Group (SHG) movement, boasting repayment rates in excess of 97% for bank loans taken by the women groups. Now, it is being reported that SHGs across parts of the State have stopped loan repayments in anticipation of the possibility of loan waivers (or interest-free loans) announced by various political parties in their manifestoes for the State assembly elections.

These waivers, like the farm loan waivers, raises serious moral hazard concerns, which threatens to roll back the considerable success achieved by SHGs over the past two decades. Hitherto SHGs have been remarkable in being free from the general dependency syndrome, characterized by reliance on handouts and doles, that have been the mark of welfare programs across the country. Moral hazard concerns arising from expectations of waivers introduces the first sprinklings of dependency into the SHG movement. Do we have the beginnings of an incentive distortion spiral in one of our most successful anti-poverty programs?

1 comment:

manilaman said...

Sadly, Micro-Loans (confused as Political Dole-Outs) temp borrowers to "forget" their obligations. This is could be true worldwide.