Developing Personal Insolvency Crises in China and India

What is it like to be desperately insolvent with no access to a relief system like the bankruptcy discharge? Many, many people are likely to find out in the coming months in China and India in light of recent developments in these mammoth markets. Neither country currently offers individuals effective relief from financial distress, though both have been actively but languidly considering the adoption of such relief for a long time. That relief can't come soon enough, though I'm not optimistic about its arrival anytime in the near future.

In China, the government is stepping up its efforts to all but eliminate P2P lending platforms, the only reliable source of finance for most individuals and small businesses. I'm afraid Bob Lawless's "paradox of consumer credit" will apply here: a rapid constriction in the supply of consumer/small business credit will lead to a spike in financial distress that can't be avoided by refinancing ... leading to even greater need for an individual bankruptcy remedy that China still lacks. To be sure, many of these P2P lending networks have been ponzi schemes, victimizing innocent investor-lenders and needing to be shut down, but I fear an over-correction here. Resolving 1.22 trillion RMB ($176 billion) in loans extended by 50 million investor-lenders to goodness knows how many small borrowers will be no small feat, especially with no formal insolvency framework to organize the effort. 

Meanwhile in India, the hot mess of corporate debt has begun to cool off, leaving debt buyers hungry for even riskier loans to purchase and pursue. So they're refocusing on defaulted consumer debt. The short-term target is debt secured by homes and cars, likely to produce greater returns from the collateral, but what of the inevitable deficiencies? Unsecured personal liability for deficiency judgments will certainly be on the to-do list of these buyers in the near term, and they are already making plans for the longer term to expand to unsecured education and credit card loans.

While India and China have both made admirable progress in reforming their business insolvency systems, the tragedy unfolding in the consumer and small business sectors cries out for serious attention. These debtors are not deadbeats whom authorities can be content to leave to their chosen fates; they are the victims of global economic volatility, the lifeblood of developing economies, and the center of harmonious societies. China and India would advance and humanize their development in a massive way by finally addressing the gaping hole in their insolvency frameworks to add proper treatment for individual debtors.

Comments

[Matthew Bruckner]

Thanks for this interesting post. I'll be interested to think a bit about whether the xinfang system has any role to play in potential personal insolvencies. I've previously thought about it as a method for airing grievances against the state, but others have suggested it has a role in private ordering as well. e.g., https://www.aeaweb.org/conference/2018/preliminary/paper/5kAKEkAF

[Gabby Robles]

What do you think are the correct steps for China and India to take to address their frameworks?

[Ebenezer Scrooge]

I support pro-debtor personal bankruptcy laws, but I'm not sure it makes all that much difference in much of the world.

Two things to remember about many places in the world: personal credit extension and debt enforcement are both typically informal. Credit is extended by unlicensed lenders--family if you're lucky. Credit is enforced by--well, I know something about the exotic foreign locale of Queens, NY. Landlords with tenants in default don't bother with the courts. Instead, they hire well-connected older men who happen to know some beefy young men. No delays, no lawyers, no muss, no fuss.

I doubt that beefy young men care any more about a bankruptcy discharge than they care about a notice of eviction.