India's Microfinance Industry Suffers as Poor Indians Stop Repaying Loans

Influenced by politicians who accuse the microcredit industry in India of profiting from the poor, almost all borrowers in one of the country's largest states have stopped repaying their loans, the New York Times reports.

Indian banks, which have invested about $4 billion, or roughly 80 percent of the money that microfinance institutions lent to poor consumers, are worried they could face serious losses if the money is not paid back. Over the past couple of weeks, lenders say that less than 10 percent of borrowers have made payments, leaving some bank officials concerned that the country's microfinance industry could damage the economy in the same way that the subprime mortgage industry did in the United States.

Initially, microloans were made to the poor by nonprofit organizations. In recent years, however, foundations, venture capitalists, and the World Bank have launched microfinance businesses that aim to make a profit while helping to lift poor Indians out of poverty. In pursuit of those profits, some institutions have extended loans at high interest rates without regard for the borrowers' ability to repay.

Responding to public anger over alleged abuses in the microcredit industry — and reports of suicides among people unable to pay mounting debts — legislators in Andhra Pradesh last month passed a law that restricts how companies can lend and collect money. Yet even as the law was being passed, local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans there have virtually stopped. Meanwhile, banks have slowed their lending as fears of default have grown.

According to the Times, some of the anger directed at the microcredit industry has been fueled by the public offering of shares of SKS Microfinance, an Indian company with American backers, including Open Society Foundations founder and chairman George Soros and Sun Microsystems co-founder Vinod Khosla. Others argue that many have stopped paying back their microloans because they believe the firms have lost sight of their responsibility to the poor.

"These institutions are using quite coercive methods to collect," V. Vasant Kumar, minister for rural development in Andhra Pradesh, told the Times. "They aren't looking at sustainability or ensuring the money is going to income-generating activities. They are just making money."

Lydia Polgreen. "India Microcredit Faces Collapse From Defaults." New York Times 11/17/2010.