22 August 2017
Dean Procter

Dean Procter

Dean Procter - Transinteract

330Posts 1,049,074Views 471Comments
Whatever...

Whatever...

A place to share stuff that isn't at all fintec related but is amusing, absurd or scary.

Microfinance Debt and Credit Card Debt - Similar?

17 October 2009  |  3351 views  |  1

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.

TagsRisk & regulation

Comments: (1)

Chris Barry
Chris Barry - V2 Innovations - Raleigh | 18 October, 2009, 08:00

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.

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
Comment on this story (membership required)

Latest posts from Dean

I've been on a sabbatical

13 March 2017  |  4205 views  |  0 comments | recomends Recommends 0 TagsMobile & onlineStart upsGroupWhere are they now?

Financials Named As Customers of Child Porn Planting Hacking Team

06 July 2015  |  2427 views  |  0 comments | recomends Recommends 0 TagsSecurityRisk & regulationGroupWhatever...

In case you wondered...

02 March 2015  |  1015 views  |  0 comments | recomends Recommends 0 TagsInnovationGroupWhatever...

Coal is a dirty business.

02 March 2015  |  1408 views  |  0 comments | recomends Recommends 0 TagsRisk & regulationGroupGoing green

It makes perfect sense of course, to have a Plan

03 October 2013  |  3175 views  |  0 comments | recomends Recommends 0 TagsMobile & onlinePaymentsGroupInnovation in Financial Services

Dean's profile

job title CEO
location Sydney
member since 2008
Summary profile See full profile »
Ubiquitous mobile phone based payments, ID, transaction authentication, mobile wallet and transport ticketing.

Dean's expertise

Member since 2008
329 posts471 comments

Who's commenting on Dean's posts