MICROFINANCE PAPER WRAP-UP: “Debt Relief in the Pandemic: Lessons from India, Peru and Uganda;” by Elisabeth Rhyne, Eric Duflos; Published by CGAP

In response to the economic effects of the COVID-19 pandemic, regulators in approximately 115 countries directed financial service providers (FSPs) to grant debt moratoria and restructuring to their borrowers. The authors of this paper reviewed surveys, interviews and other materials regarding the subsequent actions of FSPs in India, Peru, and Uganda, producing recommendations for regulators and FSPs to utilize in the future.

The majority of families that were surveyed reported declines in their financial situations. Women, immigrants, those reliant on remittances, and workers in heavily impacted sectors such as restaurants were especially vulnerable. Regarding debt, 57 percent of respondents in India and 53 percent in Uganda said their payment obligations were a burden. In Peru, 61 percent said they had stopped making utility payments. Despite this, “few people sought formal financial institution loans” to address their money troubles. However, across the three countries, a minimum of one third of loans were put in moratoria – smaller loans more commonly than larger ones.

The primary aspects of the moratoria that the authors considered were length of time, eligibility requirements and which parties were to be responsible for the costs. Regulators in Uganda allowed FSPs to offer debt moratoria or restructuring on a case-by-case basis for one year, with accrued interest to be paid by the borrower. In India, an initial three-month moratorium was extended to six months, also with borrowers responsible for interest. FSPs were allowed to make their own decisions on eligibility, which “the industry interpreted… as encouraging blanket moratoria.” Regulators in Peru allowed FSPs to choose whether to perform case-by-case analysis or place all loans into moratorium for six months, later extended to one year. Borrowers had to opt out if they preferred to keep the original conditions of their loans. The FSPs in Peru were not given guidance on charging interest and fees until the government issued a loan guarantee program with guarantees contingent on FSPs reducing interest charges on the paused loans.

Based on their analysis, the authors offer the following conclusions for regulators: 1) Debt moratoria, as a whole, are effective in allowing families to meet basic needs; 2) Regulators must weigh, depending on the type and severity of economic hardship, whether to put the financial costs of moratoria on FSPs, borrowers or government; 3) Consumers should always be given the option to decline moratoria; 4) Stakeholders must improve communication regarding the terms of moratoria (as, for example, approximately a quarter of survey respondents in India did not understand their choices); 5) The ability to revise regulations with speed is essential to keep up with rapidly changing economic conditions; 6) Regulators need to improve their monitoring of customer needs, such as via consumer associations; and 7) Greater regulation should be applied to digital lenders to reduce the likelihood of them taking advantage of borrowers in times of elevated need.

For FSPs, the authors propose: 1) developing innovative ways to proactively communicate with customers, especially those most vulnerable; 2) strengthening digital operations to reach more customers and reduce the need for face-to-face interactions; 3) updating emergency protocols to account for situations that disrupt day-to-day workflow; 4) investigating any negative impacts of moratoria on borrowers’ credit scores, which all three governments ordered shall not occur; and 5) monitoring employees for potential fraudulent activity, such as underreporting loan repayments that they have received in cash.

This is a summary of a paper by Elisabeth Rhyne and Eric Duflos, with research assistance from Jayshree Venkatesan and María Moreno Sanchez; published by CGAP (Consultative Group to Assist the Poor); December 2020; 13 pages; available at https://www.cgap.org/sites/default/files/publications/2020_12_COVID_Briefing_Debt_Relief.pdf

By Bradley Shulman, Research Associate

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