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Does multiple borrowing lead micro-borrowers into over-indebtednes? Do over-indebted micro-borrowers take loans to refinance existing loans that are ultimately unpayable and get trapped in a vicious circle of debt? Using a longitudinal household survey data, this study addresses such questions by examining the dynamic interdependency between over-indebtedness and multiple borrowing in the context of micro-borrowers in Thailand and Vietnam. Specifically, the trues state dependence and cross-state dependence effects of over-indebtedness and multiple borrowing are tested using the dynamic random effect bivariate probit model while controlling for observed and unobserved household heterogeneity. Results suggest that taking multiple borrowing simultaneously does positively influence household's risk of becoming over-indebted in Thailand, while in Vietnam it has no significant influence on household's risk of over-indebtedness. Although households reported of taking multiple loans to repay old debts, the empirical results do not support the premises that over-indebtedness reinforces households to refinance ultimately unpayable debts and trap households into a perpetual debt cycle.
Microcredit, rural credit market, household over-indebtedness, multiple borrowing, Thailand, Vietnam. - Mikrokredite, ländlicher Kreditmarkt, Haushaltsüberschuldung, mehrfache Kreditaufnahme
This study aims to explore cross-country differences in credit market participation, level of household debt holding and over-indebtedness between rural households in Thailand and Vietnam. Using a unique rural household survey data from “Vulnerability in Southeast Asia” project, it first identifies socio-economic determinants of such market outcomes for rural households in Thailand and Vietnam. It decomposes differences into a part that arise due to configuration of household characteristics or a part that arise due to differences in economic environments using three decomposition methods. Significant differences are observed in credit market participation rates and level of debt holding and indebtedness between rural households in Thailand and Vietnam. Rural households in Thailand tend to participate more in the credit market and face higher risk of over-indebtedness. These observed differences arise mainly due to dissimilarity in the economic environment for households with similar characteristics. Economically disadvantaged rural households in Thailand are more likely to participate in the credit market and face higher level of indebtedness mainly because credit markets are make borrowing easy. The higher gap observed in the upper part of the debt distribution between Thailand and Vietnam can be explained by differences in credit market conditions between the two countries.
Rural financial markets have grown rapidly in Asian emerging market economies, thus contributing to economic development and the reduction of poverty. At the same time, however, the level of indebtedness of rural households has increased, making households more vulnerable to shocks. One of the reasons for rising household debt is the ease of borrowing simultaneously from a growing number of lending institutions. This paper addresses two major questions. First, does borrowing from multiple sources increase rural households' risk of over-indebtedness? Second, do over-indebted rural households refinance their outstanding loans through multiple borrowing, running the risk of becoming trapped in a debt cycle? Employing a dynamic random effects bivariate probit model for a unique set of longitudinal household panel data from Northeast Thailand, this study examines the bidirectional relationship between over-indebtedness and multiple borrowing to determine to what extent rural households become trapped in debt cycles. On the one hand, the results indicate that households in Northeast Thailand take on multiple loans, which further increases their risk of becoming over-indebted. On the other hand, our model results do not confirm the widespread notion that over-indebted rural households use multiple loans to refinance unpayable debts.
The lack of finance is a major reason for poverty. Also a typical feature of the poor, especially the rural poor, is that their income highly fluctuates often as a result of shocks. This volatile nature of the poor households' cash-flow underlines the need for good financial management which the poor are often not well equipped to do. In emerging market economies the delivery of financial services has advanced, albeit with larges differences in access. Some programs may also have led to over-supply of credit and may be responsible for unproductive investment which may have resulted in levels of indebtedness exceeding the repayment capacity of rural households. In general, excessive debt accumulation coupled with household liquidity constraints could weaken the social and economic well-being of households and result in financial distress.This study seeks to examine household indebtedness in rural Thailand and Vietnam with a particular focus on the indebted households whose consumption level is near the poverty line. The main objectives of the study are (1) to evaluate the extent of indebtedness of households and (2) assess the changes in the level of household indebtedness over time, (3) to analyse the factors that make certain households accumulate excessive debt, and (4) to develop the concept of financial vulnerability. Results are presented in three steps. First, descriptive analysis will be carried out to assess the extent and pattern of households' indebtedness. Second, multivariate analysis will be performed to determine factors that influence households' level of indebtedness and make households more financially vulnerable. Third, longitudinal analysis will be used to examine which factors and characteristics of households influence transition of household indebtedness across time and between two countries. Results will provide policy makers and other stakeholders an insight into the financial situations of the poor suggesting appropriate measures to reduce financial vulnerability.
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