India’s Microfinance Industry Fuels Mass Suicides - CreditSlips.org

[WillyT]

India’s Microfinance Industry Fuels Mass Suicides
posted by Nathalie Martin
January 4, 2011 at 9:44 AM

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Most of us remember Muhammad Yunus’s 2006 Nobel peace prize for microfinance, small loans to start businesses, with extremely low default rates. Now it looks like this industry has done what many American financiers have done, lent more than people can ever pay back, in order to make greater profits. In India and other parts of Asia, however, cultural factors mean that over indebtedness causes more than just sadness and bankruptcy. This lending without regard to ability to repay has causes massive suicide on the part of borrowers. This is particularly insidious, given that- unlike home loans or payday loans in the U.S. - the whole point of microfinance is to help the poor start businesses.

Moreover, the industry itself 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. Indian banks, which put up about 80 percent of the money that the companies lent to poor consumers, are increasingly worried that they could now face serious losses. Indian banks have about $4 billion tied up in the industry. 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. Some companies have more than doubled their revenues annually. Recently, one of India’s largest for-profit micro lenders, SKS Microfinance, went through an initial public offering, fueling anger. The company is 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.

And it’s not just money at stake of course. People are committing suicide over the shame of not being able to pay the debts back. A 30-year-old mother of two boys poured 2 liters of kerosene on herself and lit a match, after she and her husband argued bitterly the day before over how they would repay multiple loans. Shobha Srivinas, was being pressured to pay interest on her 12,000 rupee ($265) loan. Lenders also were demanding that she cover for the other women who had borrowed, since borrowers essentially guarantee each other’s loans in order to use social pressures to ensure repayment. She had her husband are both dead after he was unable to put out the flames and got caught in them himself. More than 70 people committed suicide in this particular Indian state from March 1 to Nov. 19 to escape payments or end the agonies their debt had triggered. According to Malcom Harper, Microcredit has become “Walmartized” by unrestrained selling of cheap products to the poor. “Selling debt is like selling drugs,” says Harper, 75, the author of more than 20 books on microfinance and other topics.“Selling debt to illiterate women in Andhra Pradesh, you’ve got to be a lot more responsible.”

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More: http://www.creditslips.org/creditslips/2011/01/indias-microfinance-industry-fuels-mass-suicides.html

:evilfrown:

:banghead:

[dkf]

1. What causes an epidemic of unsafe lending that trickles to dIfferent countries like this?

Is it Wall Streets fault for showing other countries how to do this or is it some sort of natural outcome?

[bemildred]

2. Too much "capital", too few places to "invest" it at the desired "rate of return".

Exponential growth is unrealistic in the long run, and we have been running for quite a while now.

[dkf]

4. Yup.

[Gidney N Cloyd]

3. It doesn't seem to me like there's enough 'vig' here to interest Wall Street.

[Recursion]

6. De Soto estimates the world's poor have $50 trillion worth of assets

But that corruption and other problems keep them from using those assets.

It's like the payday loan market in the US. For years bankers assumed the poor had no money so they just ignore them. Then one day somebody noticed that drug dealers were getting trillions of dollars out of America's slums every year. The money was there, it just wasn't in forms the bankers cared about. But, with check cashing/payday loan scams, they found a way...

[Recursion]

5. There was an episode of "Planet Money" on NPR about this

Basically, the non-profit model takes too long and politicians (the same ones who are now urging people not to repay the loans) get sick of all the delay and red tape (which mostly serve to make sure the loans can be paid back and won't expose the larger financial sector to excessive risk) and charter corporations to get much faster-moving private capital into the villages.