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Microfinance Debt and Credit Card Debt - Similar?

Does this have any relevance to western 'micro-credit' or consumer credit cards? I notice the default rate heading over 10% for credit cards.

This is a quote from a World Bank site discussing microfinance.

"Let’s start with the concept of a loan loss rate–the percent of my loan assets that I lose in bad loans each year. As it happens, the maximum sustainable loan loss rate turns out to be about 5 percent of the loan portfolio a year in most microcredit operations. When loan losses go higher than that, they usually spin rapidly out of control unless they are brought down very quickly. Above that level, borrowers seem to notice that lots of other borrowers aren’t paying.  They may feel like suckers if they continue to pay. More importantly, their main incentive to repay stems from the MFI’s implicit promise to give them another loan when they want it, and this incentive weakens quickly when borrowers see widespread default and start to worry that the MFI may not around to make future loans."

Have borrowers in the US and elsewhere noticed that "lots of other borrowers aren’t paying". Does the fact that their savings have been decimated by the same institutions have any additional effect on the psyche of western borrowers?

Does their "incentive to pay stem from the...promise to give them another loan when they want it"? Will these new loans materialise? It appears that the reverse is happening - the amounts available under credit card loans are being diminished.

Does increasing interest rates suddenly for (from an individual's perspective) no apparent reason have a similar effect? (or worse - that the government has made new laws coming into force to prevent unexpected or unexplained rate rises and the institutions have upped the rates in advance even for apparently 'good' customers).

What percentage of 'passive' resistance (non-repayment) from consumers would cause a crisis?

The article did mention that 'The borrowers are poor but they’re not dumb.' in reference to third world borrowers - are western borrowers any less dumb?

Won't the government just bail out the banks if they suffer from credit card defaults? The answer to that is really 'yes', they are already effectively doing it because the consumer focused banks are generally owing TARP money.

Just curious.


Comments: (1)

Chris Barry
Chris Barry - V2 Innovations - Raleigh 18 October, 2009, 08:00Be the first to give this comment the thumbs up 0 likes

I think it is very similar as it taps into human behavior hence the reaction to that behavior sets the rates over time. In the micro finance world I would expect that the community - online space -would eventually catch on to rising loan losses and eventually jack up interest rates as a result until the loan risk becomes too high for borrowers and underwriter which leads to the online community eventually collapsing as a result. Caja Navarrain Spain has an interesting loan concept where the community vouches for people requesting loans which in turn helps the borrower secure a better rate - I will be keen to watch the evolution of this social trust concept grow over time.

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