The Downside of MicrocreditTwo days ago I wrote a post concerning research studies evaluating microcredit programs in India and the Philippines. Right on cue, today's Wall Street Journal published an article by Ketaki Gokhale that describes how microcredit in India may be moving beyond what the researchers' found a mixed story of effectiveness in mitigating the effects of poverty to being positively malign for some communities.
The problems Gokhale describes arise from the shift of microcredit into what is called its "second generation" form. Microcredit began as a substantially philanthropic activity, with financing derived from various non-profit sources. Recently, profit-seeking investors have become actively involved, and a range of risky practices akin to those observed in recent years on a much larger scale in standard credit markets are showing up.
The basic problem is an overabundance of funds available for lending relative to the number of creditworthy prospects for microloans. The plentitude of funds, combined with microlenders' often paying their field officers on a commission basis, makes careless underwriting a powerful temptation. For example, borrowers may be allowed to lie about such matters as the intended use of the loan they're seeking and their existing level of debt.
There is also an issue of interest rates, which Gokhale reports are generally in the 24% - 39% per annum range. Once borrowers take out a loan at a high rate, if they do not put the funds to use to generate sufficient income to pay off the loan, they can find themselves in a spiral of indebtedness similar to that which afflicts many users of payday loans in the US.
Finally, there is a religious element to the story. Many Muslim borrowers in Ramanagaram, the city in southern India where Gokhale did much of her reporting, have stopped paying on their loans in response to direction from their mosque imams, who object to "the overindebtedness of the community, and the strains it's putting on family life." Gokhale reports that these complaints are viewed by some as a smokescreen for trying to disempower women, who are the majority of borrowers. This revolt against honoring loan agreements is spreading to other communities.