India Microcredit Faces Collapse From Defaults
By LYDIA POLGREEN and VIKAS BAJAJ
Published: November 17, 2010
MADOOR, India — 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.
Kuni Takahashi for The New York Times
K. Shivamma, a 38-year-old farmer in the Indian village of Madoor, is struggling to pay back a debt of almost $2,000 incurred through microloans.
Kuni Takahashi for The New York Times
D. Mallama spoke about her daughter, Durgamma, who ran away from her village in Andhra Pradesh, India, after not being able to pay back loans from microfinance agencies.
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.
“We are extremely worried about our exposure to themicrofinance sector,” said Sunand K. Mitra, a senior executive at Axis Bank, speaking Tuesday on a panel at the India Economic Summit.
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.
Now some Indian officials fear that microfinance could become India’s version of the United States’ subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy.
Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.
Even as the new legislation was being passed, local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past couple of weeks.
If the trend continues, the industry faces collapse in a state where more than a third of its borrowers live. Lenders are also having trouble making new loans in other states, because banks have slowed lending to them as fears about defaults have grown.
Government officials in the state say they had little choice but to act, and point to women like Durgamma Dappu, a widowed laborer from this impoverished village who took a loan from a private microfinance company because she wanted to build a house.
She had never had a bank account or earned a regular salary but was given a $200 loan anyway, which she struggled to repay. So she took another from a different company, then another, until she was nearly $2,000 in debt. In September she fled her village, leaving her family little choice but to forfeit her tiny plot of land, and her dreams.
“These institutions are using quite coercive methods to collect,” said V. Vasant Kumar, the state’s minister for rural development. “They aren’t looking at sustainability or ensuring the money is going to income-generating activities. They are just making money.”
Reddy Subrahmanyam, a senior official who helped write the Andhra Pradesh legislation, accuses microfinance companies of making “hyperprofits off the poor,” and said the industry had become no better than the widely despised village loan sharks it was intended to replace.
“The money lender lives in the community,” he said. “At least you can burn down his house. With these companies, it is loot and scoot.”
Indeed, some of the anger appears to have been fueled by the recent initial public offering of shares by SKS Microfinance, India’s largest for-profit microlender, backed by famous investors like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.
SKS and its shareholders raised more than $350 million on the stock market in August. Its revenue and profits have grown around 100 percent annually in recent years. This year, Vikram Akula, chairman of SKS Microfinance, privately sold shares worth about $13 million.
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Thank You for posting this Steven,
ReplyDeleteIt makes sense.
when we talk about microcredit in India, we are not only talking about banks but we are also discussing the concept of bonded labour sorts which is very high in my area. I agree with the article and feel that pumping in capital through a social venture is not the answer. It is as important (if not more) to look at fund allocation and have a tactile product at the end which closes the loop.
I feel with the recent economic growth in the country smaller banks started giving these loans in the hope to spur growth in villages, something which was not so easy a few years ago ( you had to have a proper business plan and financial strategy in mind), the laxing of which was a system geared for collapse.
That said, I feel that the Asia- Pacific economic industry is something which we can all learn from.