India Microcredit Faces Collapse From Defaults

[Recursion]

Source: New York Times

India’s rapidly growing private microcredit industry faces imminent collapse as almost all borrowers in one of India’s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.

The crisis has been building for weeks, but has now reached a critical stage. Indian banks, which put up about 80 percent of the money that the companies lent to poor consumers, are increasingly worried that after surviving the global financial crisis mostly unscathed, they could now face serious losses. Indian banks have about $4 billion tied up in the industry, banking officials say.

...

The region’s crisis is likely to reverberate around the globe. Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit “social enterprises” that seek to make money while filling a social need. Like-minded industries have sprung up in Africa, Latin America and other parts of Asia.

But microfinance in pursuit of profits has led some microcredit companies around the world to extend loans to poor villagers at exorbitant interest rates and without enough regard for their ability to repay. Some companies have more than doubled their revenues annually.

Read more: http://www.nytimes.com/2010/11/18/world/asia/18micro.html

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There was an episode of NPR's "Planet Money" about this a few weeks ago. There's a dilemma between opening private capital like this with its predatory ways vs. the slowness with which non-privately funded ventures end up moving.

[closeupready]

1. Preying on the poor is disgraceful.

:mad:

>>Indian microfinance companies have some of the world’s lowest interest rates for small loans. Mr. Akula said that his company had reduced its interest rate by six percentage points, to 24 percent, in the past several years as volume had brought down expenses.<<

No sympathy here for this usury. None.

[Recursion]

2. OK, but there are people who are helped by the loans

And so far the NGO-led way of doing it simply isn't out in enough villages to help them. So what should they do?

[closeupready]

3. If they are lending to put profits foremost, then they need to be subjected to the same regulations

that banks are. I don't know for a fact, but I would guess that microlending enters a market promising government officials that this is an altruistic endeavor "and so we shouldn't be held to the same standards as banks", but instead, somehow or other becomes about the profit, the altruism taking second place.

So they need to be regulated and if they have pulled a fast one, there needs to be litigation.

[Recursion]

6. And that's the problem

The NGO-based microlenders (which includes much of Kiva) end up getting chartered and regulated as banks which are co-operatively owned by the residents in the area. But the red tape and infrastructure to do this can take years or even decades, which is why something like 2% of the poor in India have access to them.

[closeupready]

7. I'm not sure I understand your point, sorry.

Do you support the microlenders here? Assuming that you read the full article, how would you resolve the differences between the microlenders and debtors? Or more generally, what is the underlying problem here?

[Recursion]

8. The less-predatory lenders can't lend to enough people

That's the problem. Because of their business model they can't grow quickly enough, which is why India let the for-profits move in in the first place, because they could get to more than 2% of the population. And then predictably this sort of thing happens. It's a damned if you do damned if you don't kind of thing.

[liberation]

4. They should slave their lives to comply with glorified loan sharks...

... obviously.

[jwirr]

5. This is too bad. KIVA and others like them have helped many

people in many countries through this mechanism. Yes the middle man is making exorbitant interest but there is no one else who will borrow to these people. Is the Indian government going to replace them?