Source: www.nytimes.com
INDIA, November 17, 2010: 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.
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.
The crisis has been building for weeks, but has now reached a critical stage. Indian banks 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.
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.
K. Shivamma, a 38-year-old farmer, said she took her first loan hoping to reverse several years of crop failure brought on by drought.
“When you take the loan they say, ‘Don’t worry, it is easy to pay back,’ ” Ms. Shivamma said.
The man from Share, the company that made her first loan, did not ask about her income, Ms. Shivamma said. She soon ran into trouble paying back the US$400 loan, and took out another loan, and then another. Now she owes nearly US$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. “I know it is a vicious circle,” she said. “But there is no choice but to go on.”