Don’t be too quick to blame politicians, or the poor, for India’s microfinance crisis

As loyal readers of this blog know, I’ve been watching and reporting on the increasing turmoil in the Indian microfinance industry for a while now.

How this flap in India plays out could have profound implications for a number of Seattle organizations and many others elsewhere that promote microfinance as a tool for reducing global poverty.

Today, the New York Times reports that “India Microcredit Faces Collapse from Defaults” and says:

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, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.

This approach reminded me of the early days reporting on America’s sub-prime loan crisis.

As that story line went, experts blamed the economic crisis on low-income people taking out home mortgage loans they couldn’t afford — a narrative that tended to minimize the many financial firms that promoted this house of cards knowing it was doomed and then sold bad loans (so-called “toxic assets”) as if they were pure gold.

The NYTimes article actually goes on to give some credence to the claims of predatory lenders but then really says little to back up its claim that politicians are “egging on” the debtor revolt.

This really irked Felix Salmon, a blogger for Reuters, who criticized the NYTimes, the Financial Times and the Wall Street Journal for ignoring the political backstory in India. His post: The Lessons of Andhra Pradesh. Salmon complains that it’s hard to get the real story out of India, especially if major news organizations write about it without putting it in a political context. Salmon asks:

Are we ever going to get a good article on the hugely important microcredit crisis in the Indian state of Andhra Pradesh?

Ha! That’s a dangerous question to pose if you just wrote an article on it.

Salmon appears to lay the blame for India’s crisis on bad governance. He says the cause of the crisis was a new government regulation “which essentially shut down a whole class of microfinance lenders.” Some experts might take exception to that claim, saying it was not so much a cause as a symptom.

Salmon then goes on to say that maybe “this is one of those stories which is better reported from your neighborhood coffee shop with wifi than it is (by professional journalists) from Andhra Pradesh itself.”

Yeah, I don’t think so. At least not from my neighborhood coffee shop.

The fact is, poor Indian debtors are indeed defaulting on microloans, the industry there is in free fall and politicians there probably have been making hay with the accusations of lenders profiting on the poor.

But let’s not lose the forest for the trees here: Maybe India’s microfinance industry is under political attack and facing collapse because it really did lose credibility due to excessive profit-seeking.

The man who came up with microfinance as an anti-poverty scheme, Nobel Laureate Muhammad Yunus, warned of just this kind of a backlash in September at the Clinton Global Initiative meeting in New York City (see video below). This was before the crisis.

Yunus said some excessively profit-seeking microfinanciers are losing sight of the original mission and becoming nothing more than loan sharks.

David Roodman, one of the leading analysts of microfinance with the Center for Global Development, is in India right now and posted his thoughts on what’s going on there in his India Dispatch.

For those who want a closer look at the political gamesmanship possibly fueling this crisis, Roodman offers some juicy details. But he is also careful not to claim that this all just pure politics; Roodman recognizes that there might really be some rot at the core of the Indian microfinance industry. As he says:

What is less clear is whether these political and governmental machinations are the real cause of the crisis. Were they the firebomb or merely the spark that lit the tinder?

Based on the conversations I’ve had with some of the leading local proponents of microcredit and microfinance, most say it’s still not clear what exactly is going on with India’s microfinance industry. But what is clear, to some anyway, is that the biggest area of growth in this industry today is by commercial, for-profit organizations that have moved some significant distance from Yunus’ original vision.

The difficulty in sorting all this out is that it isn’t necessarily bad for microfinance organizations to make a profit. They need to profit to grow and serve more lenders.

The central question is about whether or not these organizations can show that the poor are benefiting from their programs, or at least prove they are not being exploited.

In India, that’s not clear and so we now have a crisis of confidence.

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Tom Paulson

Tom Paulson is founder and lead journalist at Humanosphere. Prior to operating this online news site, he reported on science,  medicine, health policy, aid and development for the Seattle Post-Intelligencer. Contact him at tom[at]humanosphere.org or follow him on Twitter @tompaulson.