"Over-borrowing: Common to US, Bosnia- Herzegovina, India and the US?": Deepak Maheshwari

Posted on November 27, 2013 by Sumita Kale

According to the World Bank’s Global Financial Development Report (released in November 2013 with ‘Financial Inclusion’ as its theme) these were examples of oversupply of credit coupled with lax due diligence to establish creditworthiness.

The US story is well-chronicled and the micro-finance institutions were in the eye of the storm in Bosnia- Herzegovina just like India though there were nuanced differences.

In case of easy credit availability, it is but natural for many borrowers to take out an additional loan to pay up an earlier one as long as there is someone else willingly extending the creditUsually, there is little concern as long as the going is good.

However, when the tide does recede, as it must, bailouts and over-zealous regulations are the usual prescriptions in the name of ‘public policy’ notwithstanding that either way the costs to the economy are humungous.

However, the biggest casualty is the trust and at times, a pervert incentive imbues weakening the repayment discipline and rhythm even furtherWhat can be done by the regulators to mitigate such problems?

Orderly growth and development is often an avowed objective of the regulation but often they also need to both encourage and engender development and deployment of disruptive innovations.

Obviously, a regulator’s job is not an easy one!

Still, if the regulation is based on the first principles and there is continuous and close monitoring in real-time, the regulator can indeed pick up early warning signals and if acted upon timely, can save the crisis.

More importantly, such prudent regulation helps sustain the ecosystem by balancing the interests of borrowers and lendersThese loans are no longer examples of political patronage.

Credit under such conditions actually boosts ‘swabhimaan’ (self-confidence) of the borrower and the propensity of the lender to extend credit to deserving cases is also enhanced due to better and timely repayment.


Deepak Maheshwari, a public policy professional, is currently associated with the ICFI as Advisor.

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