 |
| Image credit: Brett Epic/Wikimedia |
A new Wall Street Journal article says that India’s microfinance industry is in “major crisis,” as usurious interest rates spur borrowers to default on loans on a mass scale, while the government raises regulatory barriers to MFIs.
While the mass defaults are largely confined to the state of Andhra Pradesh, home to India’s biggest microlending firms, the Journal portends a ripple effect: “what happens there is frequently a bellwether for microlending in India, and programs around the world.”
The Journal has played the devil’s advocate with regard to microfinance in India for some time now, with coverage that has highlighted the possibility of a lending bubble, and questions whether microfinance is in fact a sustainable mechanism for poverty alleviation. This particular article is far more dramatic however, highlighting the fact that the current microlending system is in fact corrupt, and that that the industry as it currently stands is not sustainable.
The aim of microlending, in its ideal form, is to provide those who fall outside the traditional banking sector with easy access to small amounts of money at fair interest rates. The underlying rationale is that MFIs will be a significant poverty alleviation tool by providing people with the funds to start their own small businesses, and in time generate a sustainable stream of revenue.
The problem is that, in reality, not everyone is in a position to start a business – most of the time microfinance loans are used to say buy food, pay school fees, or pay off other loans. Not a bad thing in and of itself since these are all of course essential. But the money disappears. The criticism has been that borrowers are then encouraged to take more and more loans to keep paying off previous loans, until they’re caught in giant spider web of debt – which is what the increasing number of suicides in Andhra Pradesh has been pegged to.
