Subprime microcredit?

November 17, 2010 6:10 PM

India's microcredit industry may be near to collapse

Microcredit has been lauded as a free-market solution to poverty, but has also come under increasing criticism in recent years for the high interest rates charged and large profits generated by many lenders.

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.

Previously on MeFi: 1, 2, 3.

posted by Forktine (54 comments total)

.
posted by clarknova at 6:13 PM on November 17, 2010

That's sad news.

I always thought that there was a certain amount of overoptimism about microfinancing, but I am sad that the deflation of the bubble is having such a terrible impact on so many people's lives.

The invisible hand of the market deals out slaps as well as caresses, something not everyone remembers.
posted by Sidhedevil at 6:15 PM on November 17, 2010 [3 favorites]

“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.”

It all makes sense now, that's what we're missing in this country.
posted by Blasdelb at 6:19 PM on November 17, 2010 [18 favorites]

It's almost like the only sustainable system is one in which the state provides a basic minimum standard of living to the poor.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 6:24 PM on November 17, 2010 [37 favorites]

"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. "

Bullshit. That's not even close to what happened. The NYT should be ashamed to be disseminating Republican lies like it's established fact. Might as well as say it's because everyone's yellow sari are the color of the sky.
posted by notsnot at 6:28 PM on November 17, 2010 [29 favorites]

The invisible hand of the market deals out slaps as well as caresses, something not everyone remembers.

This is not about any market. This is about abuse of the poor by large corporations, using fine print and backhanded tactics to swindle people out of their money.

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.”

posted by notion at 6:32 PM on November 17, 2010 [9 favorites]

Indian microfinance companies have some of the world’s lowest interest rates for small loans. Mr. Akula said that his company had reduced its interest rate by six percentage points, to 24 percent, in the past several years as volume had brought down expenses.

What is the difference between this and payday lending, other than the hype? Interest rates like these are downright criminal, not "below average."
posted by mek at 6:35 PM on November 17, 2010 [9 favorites]

It could be said that interest rates like those assume a high level of default and are better than no lending at all.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 6:36 PM on November 17, 2010 [1 favorite]

yeah... 24 seems high.
posted by ServSci at 6:41 PM on November 17, 2010

24% APR is still better than most credit cards and the effective annual rate on most payday loans is way higher. For instance, a $15 fee for a two week $100 loan translates to an EAR of 3,685%. Loan sharks start to look pretty cheap in comparison.
posted by autopilot at 6:44 PM on November 17, 2010

Left unregulated, payday lenders charge ~300% interest. NPR had a story on this earlier today.
posted by JohnFredra at 6:46 PM on November 17, 2010 [1 favorite]

24 is actually low, shockingly enough. Some payday lenders in the States (until recent reforms) charged daily or weekly installment rates, plus fees, which could add up to the equivalent of 2-300% or higher annually.
posted by T.D. Strange at 6:47 PM on November 17, 2010 [1 favorite]

It's almost like the only sustainable system is one in which the state provides a basic minimum standard of living to the poor.

An idea that India has pursued for much of its post-colonial history with blessings from the USSR. Too bad the near-endemic corruption present in government at all levels makes this rather hard to do properly (there are exceptions however).

Liberalization of the economy has been good for the nation as a whole and has allowed it to grow substantially. The country was broke and in political turmoil in the early 90s when Manmohan Singh, then finance minister, instituted his reforms and started to turn things around.
posted by Throw away your common sense and get an afro! at 6:48 PM on November 17, 2010 [1 favorite]

So it turns out that microlending isn't just a form of charity, afterall. Who'd a thunk it?

I'd love to read more insidery sources about what's really going on.
posted by Nelson at 6:49 PM on November 17, 2010

Inflation in India is currently around 10%, down from 16% at the beginning of the year. That makes the real interest rate lower than it appears when you compare to US rates. The nominal rate is still fairly high and I believe microcredit in many or most cases is a just another way to exploit the poor.
posted by ChrisHartley at 6:53 PM on November 17, 2010 [1 favorite]

I was going to make a "microbailout" joke, but I'm too depressed.
posted by Joe Beese at 6:58 PM on November 17, 2010 [1 favorite]

Sad news. Muhammad Yunus spoke at my school and a lot of the micro-lending tactics described in the article sound astoundingly different from what he was reccomending.

The true face of the free market ruins another good idea to improve itself.
posted by tmthyrss at 6:59 PM on November 17, 2010 [3 favorites]

This just seems to be confirming a thought that's been simmering in my mind:

Profit desire (and the capitalistic system as a whole) does not lead to good things ipso facto. If you want good things, then you can make use of that profit desire (and other levers of the market), but it requires you to monitor and watch the system, regulate it. I'm tired of people suggesting that the capitalistic system is one where good will naturally come from it, or progress. No, that progress, that good, comes from institutions, and capitalism can be a tool, or not.
posted by X-Himy at 7:02 PM on November 17, 2010 [10 favorites]

A rural development project I worked at here in China abandoned significant parts of the standard model for its microfinance element precisely because the very poorest mountain people we were working among had so little contact with the market economy, so features like weekly meetings where small repayments were made were dropped in favour of lump sums back at the one or two points in the year when a household would be in a position to pay (in our case when pigs bought to rear went to market or when payment for off-farm work was forthcoming, which tended to be annual). Rather than complex interest we ended up with something more like a flat fee of 10 percent (i.e. borrow CNY1,000, buy some piglets and feed, rear and sell and pay back CNY1,100). Any road, on reflection it did strike me that beyond resolving access to credit issues for the already entrepreneurial (which were an issue where we were and so that is a good thing) for the majority of the people we were working with there were a host of other structural and political issues which would have needed to be resolved first for it to be truly effective.
posted by Abiezer at 7:05 PM on November 17, 2010 [8 favorites]

Microlending has the exact same structural problems that regular lending has.

Access to credit can be a really good thing. It can empower individuals to pursue investment opportunities they would otherwise be unable to reach. And in the context of micro-lending, "investment opportunities" means having the capital to start a small, local business with which to provide income for one's family. For many people, micro-lending represents the only access to opportunity available.

It can also be a really, really, really, terrible thing, when, as we've seen in America, proper regulation goes unenforced. Without solid regulation, lenders can charge absurd fees, massive interest rates, and most importantly, can convince financially unsophisticated people into taking on debt they cannot afford.

The solution here is better regulation. Micro-financing deals with the most financially unsophisticated investors out there: people who have had little or no experience with contemporary financial transactions. Arguably, it needs to be better regulated than lending institutions in developed nations, in order to meet this threat. Obviously, this is a problem, since developing countries aren't as able to produce and enforce effective regulation. I don't know what the solution is.

But I know what it isn't. It isn't celebrating the end of micro-finance. These institutions have done tons of good by providing opportunities where none are otherwise available.
posted by HabeasCorpus at 7:07 PM on November 17, 2010 [2 favorites]

I recall seeing a piece here not so long ago about the conflict betwen the founder of the Grameen bank and one of the heads of the newer for-profit microlending firms. The Grameen bank founder was adamant that this had to be done as a not-for-profit venture, helping people for the sake of improving their lives, while the profiteer was of the opinion that the profit would help poor people faster by allowing the services to proliferate...

The mortgage scandal really isn't that far off the mark: a set of programs with the basic goal of helping people buy homes was infiltrated by those who couldn't care less about the people. As the desire for growth and profit outstripped the ability of the people's ability to pay, a bubble grew and then exploded.

We are surrounded by so many stories whose moral is that, contrary to the teachings of the economists, greed is not a virtue.
posted by kaibutsu at 7:16 PM on November 17, 2010 [12 favorites]

"Microcredit has been lauded as a free-market solution to poverty"

When all you have is a hammer...
posted by phrontist at 7:17 PM on November 17, 2010 [7 favorites]

And actually, even the budding entrepreneurs would have been better served by the existing network of rural credit cooperatives left over from the collective era hadn't been under the command of the almost uniformly corrupt local bureaucracy and hence failing to perform their mandate of lending to farmers with investment ideas( other than those related to or matey with the county party secretary).
posted by Abiezer at 7:18 PM on November 17, 2010 [2 favorites]

Durgamma Dappu, a widowed laborer from this impoverished village [...] took a loan from a private microfinance company because she wanted to build a house.

Now [K. Shivamma] owes nearly $2,000 and has no idea how she will repay it. The television, the mobile phone and the two buffaloes she bought with one loan were sold long ago.

Um, I thought the idea of microfinance was to provide people with some capital so they could put it towards some kind of income-generating enterprise, like buying a sewing machine to do piecework, or a load of betel nut to sell paan to betel-chewers?

If people chose to spend their money on houses, mobile phones & televisions instead, they've only got themselves to blame, just like idiots in the west who accept every big credit card they're offered & buy piles of useless consumer junk.

If there's a problem here, it's probably that the lending companies don't have the resources to verify that borrowers are actually spending the money on what they said they would, so people in their desire for a quick leg-up to a better lifestyle are squandering the money with no thought for tomorrow. And if the lenders tried to add that level of auditing it would send the interest rates through the roof, to cover the costs of so much legwork.

I also thought that microfinance was about sums like $5, $10 or maybe $50, not hundreds - which could be another failing in the system, if greedy lenders are tempting people with too much (again, just like the credit card companies).
posted by UbuRoivas at 7:34 PM on November 17, 2010 [3 favorites]

This has been massive in the vernacular press for weeks now. Of course, the vernacular press has now become rowdy and absolutely chaotic, sensationalizing every thing that moves; for instance, just about every news article I've read talks about a 'microfinance institution' that has harrassed defaulters, without naming which.

Begins to get a bit difficult to weed-out the baddies from the 'good' ones; which is one reason why, real problems with defaults and operations apart, it is beginning to feel like a witch-hunt against the concept in the first place. Not that I'm saying there's a conspiracy; just lamenting that the vernacular press and media has been reporting these things very sloppily, and that in its sloppiness and its urge to jump to conclusions, it's made this into a witch-hunt of sorts.

_{It is also nice that this is getting worldwide traction; didn't think NYT would be much interested in Indian news, much less tales of rural penury. Guess this is no longer 1990's, where rural India would have been a bus-plunge story at best. :) Minus the obvious craziness in regurgitating debunked Repub talking points, I thought it was a reasonable piece as well.}

Reporting concerns apart, there is some real human tragedy that is absolutely heart-breaking; there's this case of an auto-rickshaw driver (non-English link here; rough translation follows) who took a loan of 24,000 rupees (or about USD 532), paid back about INR 16k from that; because he slipped in making rest of the installments, the micro-finance institution (again, they didn't name which) hounded him for repayment. Unable to bear the pressure, he sent his wife to her parents' place, and committed suicide, all for not being able to cough up about INR 8k.

Even by urban Indian standards, 8000 rupees doesn't seem like a lot of money; a friend who once saw it as his patriotic duty to dine at the Taj (yes, that Taj) found himself staring at a dinner bill of about INR 12k for two. There's never a direct causation in suicides, but surely, not having a mere INR 8000 shouldn't have contributed towards the loss of a human life.
posted by the cydonian at 7:36 PM on November 17, 2010 [11 favorites]

(disclaimer: mobile phones are apparently a boon for peasants, so they can find out the true market rates in regional centres, and not be ripped off by middlemen. i'm not sure if this would apply to a local seller of buffalo milk, though...)
posted by UbuRoivas at 7:38 PM on November 17, 2010 [1 favorite]

Matt Wade did a good piece on this in the Sydney Morning Herald last weekend. Interestingly, he had also done a piece in 2005. Snippets from both:

2005: Millions of microloans have been made in Bangladesh and research by the World Bank, an advocate of microfinance, has concluded they have been crucial in reducing poverty in that country.

2010: The sari shop she started with her first loan did not turn a profit but she says microfinance institutions encouraged her to take on more debt. "When these people keep coming and offering us money we are tempted," she says.

The SMH website isn't loading the 2010 article for me. This is the link, if it works for you.

The change from 2005 to 2010 seems to be that micro-finance has now become an "industry". Most present-day micro-finance companies are essentially just loan sharks with IPOs.
posted by vidur at 7:41 PM on November 17, 2010 [1 favorite]

kaibutsu: We are surrounded by so many stories whose moral is that, contrary to the teachings of the economists, greed is not a virtue.

You've got that wrong. Economists think of smart greed as a virtue. Stupid greed is punished by the marketplace, which is what's happening here. These lenders are being wiped out. Presumably, the smart ones, the ones that were trying to actually help their clients, will survive.

I was shocked when I saw one lender being terribly proud that they were charging "just" 24 percent. I'm sorry, but that kind of interest rate is unconscionable. It would require an insanely lucrative investment opportunity to make that cost of interest worthwhile.
posted by Malor at 7:51 PM on November 17, 2010 [3 favorites]

Yes. This thing they're calling micro-financing? I don't think they really know what micro-financing means.
posted by jabberjaw at 7:54 PM on November 17, 2010 [1 favorite]

kaibutsu, not sure if this was posted to the Blue, but you might be thinking of this Planet Money podcast on whether helping the poor should be profitable.
posted by chrominance at 7:54 PM on November 17, 2010

The point of microcredit seems to be bringing rural people, women especially, into the capitalist model.
posted by serazin at 8:04 PM on November 17, 2010 [4 favorites]

Profit desire (and the capitalistic system as a whole) does not lead to good things ipso facto. If you want good things, then you can make use of that profit desire (and other levers of the market), but it requires you to monitor and watch the system, regulate it

Seems like we should be treating profit desire like an exothermic reaction. The heat is absolutely necessary to do the work you're trying to do, but you need to be rather careful with it and not just let it burn.
posted by flaterik at 8:26 PM on November 17, 2010 [4 favorites]

chrominance: Yes, that's the one.

Malor: Isn't the problem of bubbles that a given kind of greed is 'smart' until everyone knows about it, at which point it becomes stupid? Home mortgages were a great business to be in until the bubble popped; the toxic assets turned into hand grenades that no one wanted to be caught holding, and those who managed to get rid of them before the explosion did quite well for themselves.

There's a recurring theme here: The business-minded do something that you might call stupid greed, and then find a way to get someone else to live down the consequences. That's what bank bailouts are - a way to push the consequences of stupid greed of the bankers off on the populace. The problem is that if the bankers don't have to suffer consequences, then their stupid greed becomes smart greed, and they are thus encouraged to indulge in the next round of get-richer-quicker-schemes, helpful to no one but themselves in the end.
posted by kaibutsu at 8:42 PM on November 17, 2010

Franchises were a catalyst for economic development in the Western world: back when you couldn't get a loan to open ten restaurants, you could open one restaurant and sell your rights to nine franchises to expand without too much debt.

The problem in the developing world is slightly different: there are banks, but no one has any collateral to borrow from them. Someone should invent micro-franchises to solve that problem. For example, they'd loan someone a sewing machine and specific instructions for things to make with it. You'd get a brand name, advertising, and guaranteed freedom from competition within a certain (small) distance. Can't pay the loan? You just have to give the sewing machine back.

I should be a development economist!
posted by miyabo at 9:30 PM on November 17, 2010

It sounds like the problem isn't an inability to pay, but rather a choice not too. A borrower strike brought on by overly aggressive creditors.

Anyway, this is similar to the subprime crisis in that it started out as a simple thing, but once people realized that there were profits to be had -- profits largely unaffected by the global downturn, money pored in. People were plyed with loans they'd never be able to repay.

The difference is that unlike the US with sub-prime, you don't have a powerful government in your pocket to make sure you get paid. There are no credit reports, no foreclosure courts, etc. So if people decide not to pay, you're screwed.

Oh well.
posted by delmoi at 9:59 PM on November 17, 2010

They'll just send in goondas instead, either directly from the creditors, or after farming out the bad debts to the good old-fashioned village loan sharks.
posted by UbuRoivas at 10:10 PM on November 17, 2010

For example, they'd loan someone a sewing machine and specific instructions for things to make with it. You'd get a brand name, advertising, and guaranteed freedom from competition within a certain (small) distance. Can't pay the loan? You just have to give the sewing machine back.

This is a really nice euphemism for how sweatshops work.
posted by Sara C. at 10:54 PM on November 17, 2010 [5 favorites]

About time. Now maybe we'll get something far more relevant and appropriate rather than a gold rush screw the customer attitude.
posted by The Lady is a designer at 3:45 AM on November 18, 2010

I was shocked when I saw one lender being terribly proud that they were charging "just" 24 percent. I'm sorry, but that kind of interest rate is unconscionable.

This is the power of capital: it has its own momentum. These rotten fucks expect 24% interest for doing nothing. They are paid strictly because they have and you do not have. It is a fundamental inequality that can never be rectified without direct intervention.

That said, buying a home is not an investment. Once again, for the Americans: a home is not an investment. NEVER EVER. An investment generates capital. A home is just a place to put yourself at night. A home is a sweater made of bricks.

Anyone borrowing money just so they can have shit deserves said shit to be taken away if they can't repay their loans. And any lender stupid enough to lend money that has ZERO investment potential (once again: like a house) should not be surprised when they don't get their money back.
posted by Civil_Disobedient at 5:21 AM on November 18, 2010 [1 favorite]

"These rotten fucks expect 24% interest for doing nothing . . . Anyone borrowing money just so they can have shit deserves said shit to be taken away if they can't repay their loans. And any lender stupid enough to lend money that has ZERO investment potential (once again: like a house) should not be surprised when they don't get their money back."

I know there's a lot of spittle flying in this thread, and 24% certainly seems abusive, but wow. man. Way to object to the basic concept of "lending" and "finance" and "mortgages."

Medieval Europe called, they want their conception of usury back. I'll be sure to buy my house with cash upfront.

As to microfinance generally, put me in the category of "good idea, poorly executed and abused." Like Habeas said upthread, there's nothing to celebrate here.
posted by ScotchRox at 7:52 AM on November 18, 2010 [3 favorites]

This is what happens when micro-finance stops being non-profit and starts being usurious. It's a shame that community-oriented non-profit microlenders will be caught up in all of this - not just the resulting defaults, but also in terms of PR fallout.
posted by thewittyname at 8:32 AM on November 18, 2010

Some Stats About Money Lenders [from India’s Money Lenders – The Colonial Stereotypes]

There are 34,000 money lenders – and they have lent money to more than 2,00,00,000 farmers. They account for nearly 30% of the rural credit flows – and more credit than all the nationalized banks put together. They charge between 18% to 36% p.a. interest generally. Lesser than what most ‘educated’ credit card users pay – and what ‘modern’ banks charge their English speaking customers.

So much about ‘usury’ by money lenders. From one of the previous FPPs
posted by The Lady is a designer at 8:40 AM on November 18, 2010

This is not about any market. This is about abuse of the poor by large corporations, using fine print and backhanded tactics to swindle people out of their money.

That is what the "invisible hand of the market" generally boils down to, in my cynical opinion.
posted by Sidhedevil at 10:16 AM on November 18, 2010 [2 favorites]

"too important to fail" ?!
posted by epersonae at 10:56 AM on November 18, 2010

Way to object to the basic concept of "lending" and "finance" and "mortgages."

I work in finance. We (my co.) lend money. That's how we make money. And let me tell you, as someone who actually does this sort of thing for a living, 8-6 every day, if you think my screed objected to the basic concepts of lending, finance or mortgages, then you have absolutely no idea what you're talking about.

I'll be sure to buy my house with cash upfront.

No, you won't. In fact I'm so sure of it that I bet you a thousand dollars, right here and now for all the world to see, that you won't.
posted by Civil_Disobedient at 11:48 AM on November 18, 2010

"He defended the industry’s record before the India Economic Summit meeting, saying that a few rogue operators may have given improper loans, but that the industry was too important to fail." (emphasis mine).

Oh dear god.
posted by chairface at 12:03 PM on November 18, 2010

kaibutsu: Malor: Isn't the problem of bubbles that a given kind of greed is 'smart' until everyone knows about it, at which point it becomes stupid? Home mortgages were a great business to be in until the bubble popped; the toxic assets turned into hand grenades that no one wanted to be caught holding, and those who managed to get rid of them before the explosion did quite well for themselves.

Absolutely. But that's central banking gone awry, not essential capitalism. All these bubbles expanding and then popping everywhere are symptoms of monetary disorder. As you can see, they're very destructive.

Modern money is not an asset, it's a claim on wealth, and there are far more wealth tokens in the system than there is wealth to satisfy those claims at par value. That's why you get these huge hot money flows as currency chases returns in ever-weirder places. There's simply too much currency and not enough real wealth production.

This bubble is just another symptom, of many many many worldwide, of the same fundamental problem -- the world's monetary system is dysfunctional, distorted to serve the needs of the banking system, at the expense of the real economy.
posted by Malor at 12:08 PM on November 18, 2010

I should say, more accurately, that there is too much debt, and not enough real wealth production. Modern currency is just a special case of debt, and in fact is only a small fraction of the total.

The reason it's so central to the problem is because the Fed will temporarily step in with any amount of money to keep the system solvent in a crisis, so the functional currency supply is far greater than what's actually in circulation most of the time. That expectation of unlimited liquidity has seeped into every corner of the financial system, allowing expansion of debt claims (many of which function more or less like money themselves) beyond all reason.
posted by Malor at 12:13 PM on November 18, 2010

That said, buying a home is not an investment. Once again, for the Americans: a home is not an investment. NEVER EVER. An investment generates capital. A home is just a place to put yourself at night. A home is a sweater made of bricks.

That's true, but only in a specific set of circumstances: if your house attracts a capital gain exactly equal to the rest of the market it's a false gain if you stay in the market to the same level, because the increased price on the new place you shift into will eat up all the paper "profits" that your original home gained.

However, a home can be an OK investment if you choose wisely & get a place that appreciates more relative to the rest of the market; if you make capital improvements that people are willing to pay over the top for; if you downsize (eg as an empty nester) to a more modest place & pocket the difference; if you somehow leave the real estate owners' market altogether; if you move to a country or region with relatively cheaper real estate; or if the house is a second or subsequent property that you rent out for cash flow.

But what you said is generally true if your primary home "appreciates" on paper in a rising market - you'll probably never realise the paper gains because, like I said, the rest of the market has gained to about the same extent.
posted by UbuRoivas at 1:07 PM on November 18, 2010

Also, is 24% that much of an extortionate rate? There must be a lot of relative overhead in microfinance, with small loans, a high volume of accounts & short repayment periods. It's like the difference between everyday transaction accounts with lots of churn & low balances, versus investment-type savings accounts with longer, fixed periods. One is costly for banks to administer & doesn't generate much saving for lending out elsewhere, the other is stable with fewer overheads & more predictability.
posted by UbuRoivas at 1:11 PM on November 18, 2010

if you think my screed objected to the basic concepts of lending, finance or mortgages, then you have absolutely no idea what you're talking about.

Or perhaps I misread you as saying that all moneylenders were "rotten fucks" who did "nothing" and that anyone who lends money to buy a house is stupid; your self-described "screed" was certainly susceptible to that reading. Apparently, working in finance, you don't believe that. good.

As to residential properties never being sound investments, instead of pointing out the myriad situations where they are, what UbuRoivas said.

No, you won't. In fact I'm so sure of it that I bet you a thousand dollars

Because I was being sarcastic about purchasing a house with cash, I respectfully decline your wager.

Actually, better yet, I'll accept the bet and purchase a few credit-default swaps on myself actually paying. Where's AIG, they'll buy anything...
posted by ScotchRox at 2:14 PM on November 18, 2010

Let's not paint the whole field of microfinance, of which microcredit is a sub-category, with such a broad brush.

One point I'd like to make here is that the people living in poverty in India or other countries may be poor, or even illiterate, but they are not dumb. Usually they are surprisingly numerate because that is an essential skill. Especially so, since 50% of them are self-employed.

So, do you really think that millions of people signed up for microcredit loans with worse rates than the moneylenders previously operating in their area? The usurious rates of local loan sharks and moneylenders is one reason why microcredit exists in the first place.

A 24% interest rate may sound high to us, although, as some have pointed out above, it's not that high at all compared to consumer credit in this country. It is much more justifiable to have higher interest rates for an organization operating in a rural environment withlimited infrastructure. Our credit card companies can send mass mailings, collect with direct debit and call or email customers if they need. I'm pretty sure that costs a little bit less per capita than sending a loan agent on a scooter out into the countryside to try to organize a group of women into a savings and credit club.

Another reason that microfinance exists is because people in these situations usually have no access to financial services. There are no banks that would even let them open an account, let alone give them a loan. Not to mention that there are no banks in the village or the next largest village or perhaps even the closest market town. Microcredit borrowers are engaged in a capitalist system whether they want to be or not. Microfinance is just giving them access to financial services that all us other capitalists take advantage of every day.

What would you say if we took Durgamma Dappu's story and twisted the words used to tell it a bit? A widowed women in rural India, socially disadvantaged, and without a credit history was given a loan so that she could buy a house, shelter she would not otherwise have. I don't know, that sounds like give someone a fair shake, like trusting them enough to believe that they'll pay back, like believing that even marginalized members o society deserve housing. I don't have the details of how they collected the loan and so I'm willing to admit there may or may not have been coercion. They certainly should have worked with her on making alternate arrangements for her payments. But who's to say they didn't, or wouldn't have?

Whatever problems you may have with capitalism, it is the predominant economic system, and people will die if they aren't allowed to participate in it. I believe that this is the motive behind the "too important to fail" quote. We aren't talking about greedy people swindling others who want to buy plasma screen TVs, we're talking, mostly, about organizations trying to help people break the cycle of poverty. To help poor people become self-sufficient in countries with no social safety nets, to send their kids to school and simply feed themselves and their families.

I do take issue with purely greedy microfinance institutions trying to take advantage of the situation of the poor - they're abhorrent. I am a firm believer that microcredit should be practiced as a poverty alleviation measure. This is right in line with Prof. Yunus' vision - and, in fact, he has written that the "greed is good" philosophy is an egregious oversimplification of what humans want for and from our social interactions. Microfinance needs to be run like a business, but with another bottom line that incorporates social impact.

Some argue that microfinance needs to be for-profit in order to reach the vast numbers of potential clients in as little time as possible. I think this is misguided and disproved by the growth of Grameen, FINCA and nonprofit credit unions. Nonprofits are not forbidden from making a profit, after all, they just have to reinvest it, as credit unions do, back into their programs. And we've seen plenty of examples by now (Compartamos, I'm looking at you) of for-profit miicrofinance screwing over the people they are supposed to serve.

Let's regulate the hell out of the microfinance industry. Let's make it more focused on the poverty alleviation and social impact that are its raison d'etre. Let's not cast an incredibly successful intervention aside because some people are assholes and we in America happen to be suffering from the greed of some other, wholly unrelated, assholes gaming the system.
posted by HE Amb. T. S. L. DuVal at 8:38 PM on November 18, 2010 [1 favorite]

people in these situations usually have no access to financial services. There are no banks that would even let them open an account, let alone give them a loan. Not to mention that there are no banks in the village or the next largest village or perhaps even the closest market town.

I haven't been back since around 2006, and things are surely changing, but it's worth pointing out that banking in India (in my experience) is incredibly archaic & bureaucratic.

ATMs have been showing up in cities, but I remember a major bank advertising proudly within the last decade or less that their new system would allow (high value) customers to make transactions at branches other than their home branch! For people not privileged enough for that kind of service, it was all done with old style paper passbooks, at the branch where your signature & other details were held, no doubt in piles of manila folders tied with ribbons.

To give an example of the bureaucracy, cashing a travelers cheque would typically take about half an hour or more. You'd fill in a bunch of forms, queue, present the forms & wait patiently. During this time, you might be given a glass of chai, and you might sometimes even sit & chat with the manager about cricket.

After a while, you'd get your forms back, marked up and rubber-stamped. You'd queue at another counter to receive a thick brass disk with a number etched into it. This is your encashment token. You'd wait near a bunch of counters caged in with grilles on all sides until your number came up, then you'd present your disk, and receive your cash & (usually handwritten) receipt.

When the banks started to modernise with computer equipment, the staff & unions resisted this, on the basis that it would shed jobs. When you had about half a dozen people handling a simple transaction that would take about a minute in the west like a TC encashment, you can see why.

Getting to the point now, it's more than likely that new players like microfinance companies are able to enter this market without all that kind of baggage & red tape, making them far more agile & far more able to reach out into new market segments traditionally ignored by the dinosaur banks.
posted by UbuRoivas at 9:12 PM on November 18, 2010

Alex Counts, the head of the U.S.-based Grameen Foundation, responds to the situation.

The money quote that demonstrates the difference in philosophy between Grameen and some of these other microfinance institutions:

Grameen Foundation strongly believes that MFIs must measure their social performance as rigorously as they measure financial performance – in other words, they must demonstrate that they are reaching the poor and poorest, and that these borrowers are moving out of poverty over time.

posted by HE Amb. T. S. L. DuVal at 3:23 PM on November 19, 2010