A Subprime Crisis for the Poorest?

Vivek Nemana is a graduate student in economics at New York University and works for DRI.

The impending collapse of the microfinance industry in Andhra Pradesh, one of India’s largest states and a major hub of microfinance, is the ultimate example of a silver aid bullet…not being a silver aid bullet at all. The New York Times reports:

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.

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.

The FT apocalyptically adds:

The crisis that began in Andhra Pradesh threatens to spill over to the entire sector, with other states already feeling ripples against the industry. That could trigger a wave of bank defaults nationwide and a rural liquidity squeeze.

But is microcredit really as bad as it seems? Last month, the Wall Street Journal wrote:

Microlending companies say that often where they have investigated suicides attributed to their lending, they have found that microloans were among the smallest of the many problems of the people that have killed themselves.

And in a Journal Op-Ed:

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 [Indian politicians] 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.

Doesn’t quite sound like the end of microfinance as we know it, but we’ll keep our ears perked. Can micro-lending be both for-profit and sustainable for development? ------------------- Image Credit: neytri