Wednesday, December 8, 2010

The Ignored Financial Crisis

. Wednesday, December 8, 2010

It's in microfinance, in India:

The situation on the ground seems to have remained largely unchanged since we covered the story here: collections in Andhra Pradesh are still on hold, the MFIs remain on the defensive (it seems that SKS's "voluntary" interest rate cap approach is now being more widely adopted), and the scope and nature of regulation in the Indian market remains vague. This is so far an Indian story (though there are also unrelated worries in Bangladesh) but it raises a lot of questions about what we can or should expect from microfinance and what the right way to regulate what is now a pretty big market, with a whole lot of poor borrowers, is.

India's financial regulations had been praised during the subprime crisis (e.g. here, from 2008). Maybe their risk exposures were just different.

A bunch of prominent development economists co-wrote an op-ed in The Indian Express. They conclude:

When it works well, microfinance can be a win-win situation, as the poor can borrow money at rates that may look high, but are much lower than those offered by moneylenders; and banks can make a sustainable business in lending to the poor. All this rests as much on a social contract as on a legal contract. MFIs need to be more diligent in their lending and screen borrowers better — if too many borrowers can’t repay their loans, the social obligation will start to fall apart.

But politicians also need to be wary — in taking aim at the occasional overstep, they may find themselves inadvertently destroying the whole business, at great cost both to the poor, and the financial institutions that have stepped in to work with them. If we are not careful we may end up in the pre-microfinance world. That would be a great disservice to the poor, and their hope of climbing out of poverty.


The Ignored Financial Crisis




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