NY Times: 80% of India microloan borrowers defaulting

Discussion in 'Economics' started by latinotrader, Nov 28, 2010.

  1. http://www.nytimes.com/2010/11/18/world/asia/18micro.html?_r=1

    India Microcredit Faces Collapse From Defaults
    Published: November 17, 2010

    MADOOR, 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.
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    Kuni Takahashi for The New York Times

    K. Shivamma, a 38-year-old farmer in the Indian village of Madoor, is struggling to pay back a debt of almost $2,000 incurred through microloans.
    Enlarge This Image
    Kuni Takahashi for The New York Times

    D. Mallama spoke about her daughter, Durgamma, who ran away from her village in Andhra Pradesh, India, after not being able to pay back loans from microfinance agencies.

    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.

    “We are extremely worried about our exposure to the microfinance sector,” said Sunand K. Mitra, a senior executive at Axis Bank, speaking Tuesday on a panel at the India Economic Summit.

    The region’s crisis is likely to reverberate around the globe. Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit “social enterprises” that seek to make money while filling a social need. Like-minded industries have sprung up in Africa, Latin America and other parts of Asia.

    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.

    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.

    If the trend continues, the industry faces collapse in a state where more than a third of its borrowers live. Lenders are also having trouble making new loans in other states, because banks have slowed lending to them as fears about defaults have grown.

    Government officials in the state say they had little choice but to act, and point to women like Durgamma Dappu, a widowed laborer from this impoverished village who took a loan from a private microfinance company because she wanted to build a house.

    She had never had a bank account or earned a regular salary but was given a $200 loan anyway, which she struggled to repay. So she took another from a different company, then another, until she was nearly $2,000 in debt. In September she fled her village, leaving her family little choice but to forfeit her tiny plot of land, and her dreams.

    “These institutions are using quite coercive methods to collect,” said V. Vasant Kumar, the state’s minister for rural development. “They aren’t looking at sustainability or ensuring the money is going to income-generating activities. They are just making money.”

    Reddy Subrahmanyam, a senior official who helped write the Andhra Pradesh legislation, accuses microfinance companies of making “hyperprofits off the poor,” and said the industry had become no better than the widely despised village loan sharks it was intended to replace.

    “The money lender lives in the community,” he said. “At least you can burn down his house. With these companies, it is loot and scoot.”

    Indeed, some of the anger appears to have been fueled by the recent initial public offering of shares by SKS Microfinance, India’s largest for-profit microlender, backed by famous investors like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.

    SKS and its shareholders raised more than $350 million on the stock market in August. Its revenue and profits have grown around 100 percent annually in recent years. This year, Vikram Akula, chairman of SKS Microfinance, privately sold shares worth about $13 million.

    Lydia Polgreen reported from Madoor, and Vikas Bajaj from Mumbai, India. Hari Kumar contributed reporting from Madoor.
    A version of this article appeared in print on November 18, 2010, on page A5 of the New York edition.

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  2. There are many scams discovered in India right now.
  3. This proves wrong "BRIC will dethrone USA"
  4. Some people say USA will be the king. Some people say Europe will be the king. Some people say BRIC will be the king. There are 196 or 200 countries. It is an endless debate.

    There will be only one king and the whole world will see it one day.

  5. govt's like corporations exist to make a small minority wealthy.
  6. India GDP currently is growing at 9% p.a which could shoot up to 10% p.a starting from 2013 overtaking china as worlds fastest growing major economy.

    Where China was in 1998, India is now in 2010. India is 12 years behind China.

    If India can manage to grow at 10% p.a for next 2 decades, most of the problems which India face will be solved. Poverty will still remain as 30-40 million out of 1500 million Indians in 2030 will still be under poverty line but most of the problems will be solved.

    US will be a global leader. Look at the stats:

    300 million brilliant Americans produce $ 14.5 trillion of GDP.

    1500 million Chinese produce $ 9 trillion GDP (PPP basis)

    1200 million Indians produce $ 4.5 trillion GDP (PPP basis)

    On per capita basis, US will be a global leader. On total economy size, China will be global number 1. India will be third on both counts.

    Remember, America and India are great friends. Bush gave India nuclear deal, Obama has invited Indian companies to create jobs in US by investing $ 10 billion.

    US and China are not friends. India and China have a mixed relationship.

    It is US and India friendship which Indians and Americans are proud of. In fact, i expect cross pollination in future.

    Indian Man will like to marry American Woman to create Indo American babies.

    American Man will like to marry Indian Woman in future as India opens its economy as a part of globalization process.

    India is a great country..all it needs 10% growth for next 2 decades to solve most of its problems.
  7. iprph90


    it is quite ironic that nobel laureate muhammad yunus's (pioneered the concept of micro-credit) exact goal and purpose was to break the vicious cycle of debt resulting from exorbitant interest rates charged by loan sharks. leave it to human greed to find a way to turn true social reform into a profit making scheme.
  8. iprph90


    your synopsis is about as simplistic as a bollywood film...i could'nt resist.
  9. Some years back I was watching TV and a man was giving speech to some 25 prostitutes. He said "together we will rule/dominate the world" (something like that)

    I said "it is over".

    Everybody wants to rule/dominate. Everybody wants to be the king.

    But the fact is everybody cannot rule/dominate. There will be only one king.

    I know I should not have written this here but this had to come out some day.
  10. SKS MICROFINANCE- India's leading micro finance institution shares collapsed recently on host of problems including this one.

    I think it is a temporary noise before sense prevails..money lenders in India charge 100% p.a interest rate while micro finance institutions charge 36% p.a.

    The higher interest rate is because of higher default risk which micro finance institutions are taking in their books.
    #10     Nov 29, 2010