If you have been following recent developments in the Indian microfinance industry (Issues: Microfinance, p245), you will know that it appears to be falling apart as quickly as it expanded. The articles in the two urls below indicate the extent of the crisis and outline some of the reactionary legislative responses that are being put in place.
While the first article focuses on the damage being done in 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. 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 second article looks at the contagion effects in nearby countries:
“Bangladesh, the birthplace of the global microcredit movement, has decided to cap interest rates for microloans at 27 per cent, the latest sign of a growing regulatory backlash in south Asia against an industry once hailed as a "magic bullet" to cure poverty. The move came just days after India's microfinance industry agreed to a voluntary 24 per cent interest rate cap on its microloans in the southern state of Andhra Pradesh, where local authorities have accused the industry of charging usurious rates and employing coercive collection tactics.”
Spurred by high repayment rates and the success of organizations such as Grameen Bank (Case-studies: Grameen Bank, p246), for-profit firms quickly realized they could make money in microfinance, as well as bolster their CSR credentials, as long as they remained relatively more virtuous than the loan sharks that had previously dominated the market.
‘Relatively more virtuous than loan sharks,’ however, is not setting a very high bar. It certainly does not make a firm virtuous by any objective measure. While there are definitely higher costs involved in making smaller loans to a larger number of customers over geographically dispersed areas, it is not clear how charging up to 50% interests rates achieves the social mission of alleviating poverty (which is the driving force behind microfinance). What is happening, in reality, is relaxed standards for loan issuance on the part of firms seeking to grow and higher indebtedness on the part of already poor borrowers who are increasingly incentivized to borrow.
For-profit firms, naturally, face pressures to grow and be more profitable than not-for-profit organizations. What is vital in order for firms to retain the societal legitimacy necessary for long term survival, however, is that this growth is pursued within a sustainable business model. While having politicians encouraging loan recipients to stop making repayments is far from ideal, the Indian and Bangladesh microfinance firms that are suffering as a result have only themselves to blame.
Take care
David
Instructor Teaching Site: http://www.sagepub.com/strategiccsr/
The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/
Microcredit Is Imperiled In India By Defaults
By LYDIA POLGREEN and VIKAS BAJAJ
1393 words
18 November 2010
The New York Times
Late Edition - Final
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Bangladesh caps microfinance rates at 27%
By Amy Kazmin in New Delhi
485 words
10 November 2010
Financial Times
