Indian microfinance has seen better days.
In case you hadn’t heard, last week the microfinance industry in India was sent into a default crisis. The storyline: microfinance institutions lent irresponsibly to poor clients who couldn’t possibly handle the debt, then used coercive collection methods, which led to a growing number of suicides. The NYTimes reported:
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.
The bad guys are the profit-greedy lenders, the victims are the helpless poor, and the saviors are the government officials who acted swiftly, passing harsher regulations and encouraging debtors to renege on their loans.
Hold the phone.
I don’t know a lot, but in my few short trips around the sun I’ve learned it’s never that simple, especially when politicians are telling the story.
Enter Eric Bellman at the Wall Street Journal. In an open letter to the legistlators in Andhra Pradesh, India, he writes:
Up until a month ago, at the biggest lenders, less than 2% of borrowers in the state were missing payments on their microloans. The payment crisis, where people abandoned their repayment schedules, happened only after you told borrowers they didn’t have to pay. If this borrowers’ rebellion was triggered by dirty lenders, one would imagine the default rate would have expanded gradually before tipping into crisis.
Check out the article, he has a lot more to say.
My thoughts? I am still no expert on the specifics of what happened, but here are a few takeaways:
- Not all microfinance institutions are the same. There is a wide spectrum of credit policies, recollection policies, level of efficiency, interest rates…you get the picture.
- A government -encouraged boycott on repaying loans has a devastating effect on all microfinance institutions, both efficient and inefficient, respectful or predatory.
- If any or all microfinance insitutions used force or fraud in gaining clients or collecting payments, then those institutions should be prosecuted for their specific crimes.
- Poor people are poor, not stupid. The VAST majority of micro-borrowers know what they are doing when they voluntarily choose to take out a loan with a micro-lender. I know this because I’ve met them, visited their homes and businesses, and seen responsible micro-lending at work (in the DR). You can fool some of the people some of the time, but you can’t fool all of the people all of the time.
- Stricter regulations sound good (capping interest rates, for example), but the inevitable unintended consequence is to limit the number of organizations competing to supply poor people with the financial services they demand. The more competition, the better the customer focus. Less competition…loan sharks rejoice.
- Ethical norms are absolutely needed, in every industry including microfinance. But these norms (i.e. loan policies, interest rates, repayment policies) can, do, and must emerge from within the industry, not externally imposed by outsiders who don’t understand how microfinance works.
- We need to de-sensationalize the microfinance conversation. Microfinance is NOT, nor has ever been, the silver bullet for solving poverty. There is no silver bullet for poverty, or any other problem. There are, however, normal bullets that do damage here and there. Microfinance has proved to be one of those bullets.
HT to VN at AidWatchers.