India Micro-Credit Market Starts To Collapse

There is body of evidence that Indian citizens who took out small micro-loans to start businesses or expand small enterprises are increasingly defaulting on those obligations. India’s banks are behind most of the loans as they have created pools of money to aid the micro-loan business. Reuters says they have about $4 billion tied up in the sector.

The flaws with micro-lending are not hard to guess. Many of the recipients know nothing about finance. They do not know what their future income compared to expenses will be and are unable to make the most simplistic calculations about those things. The impoverished are a poor credit risk because they are not trained in business which is not something that should be expected in the first place. In the US, even solidly middle class people cannot get loans. Banks fear default rates too much.

The micro-finance business was a kind of movement of the moment which began to be extensively reported in the media about five or more years ago. Muhammad Yunus a founder of the Grameen Bank, an institution that provided microcredit in Bangladesh, won the Nobel Prize. It turns out that his plans may have been well-intentioned, but not practical.

The one thing that is common to all loan pools is that some of the loans in them will default. Among major, profitable companies, that is less likely, but possible. Large numbers of poor Indians are another matter. That says nothing about their standards or willingness to pay. It says a great deal about their circumstances.

Popular financial instruments often go through a pendulum period. They are, at first, among the best ideas in the industry. The reality of how they work and what their returns are finally comes to light. Then, they are suddenly ideas that never could have worked because they were ill-conceived.

Micro-financing in India is about to drop sharply if it has not done so already. No one powerful was willing to put the brakes on the programs, brakes based on history and rational thinking. Now the industry has fallen into disrepute. Due diligence, it seems, always has its place in monetary transactions no matter how small or simple.

Douglas A. McIntyre