The Gold Standard  

Seventh question: Is there any evidence of irresponsible lending, like the sub prime in U.S.A.?

There is no direct evidence of any large scale lending in India that could be characterized as irresponsible lending. But, a study should be made of commercial banks’ lending and support to micro-finance institutions, which are profit-seeking (MFI-PS). Here also, one can describe a possible scenario. A commercial bank may legitimately prefer to lend to an MFI-PS at a rate far higher than it is permitted to lend to its low-income customers. Bank lending to MFI-PS gets the benefit of treatment as priority sector lending. The MFI-PS in turn charges market-based rates of interest, while not attracting the jurisdiction of laws relating to money lending or usury. Micro-finance is an area of respectability, and impressive profitability of MFI-PS in India is attracting investments from private equity funds globally, with a huge premium. [More here]

There may therefore be merit in a detailed analysis in a sort of supervisory review of the incipient tendency towards irresponsible or usurious lending through MFI-PS: It is useful to note that these MFI-PS are growing too rapidly and making too much profits for comfort.

Some insiders in the Microfinance sector bristle at this suggestion, first made in a Wall Street Journal article. There is an interesting discussion of that article here and a counter-response from SKS founder Vikram Akula is here. Vikram Akula responds with some specifics. He cites reports filed by MFIs to MIX – the non-profit Microfinance exchange and he cites other studies that refute the largely anecdotal WSJ story. Unitus’ response to the WSJ article is lacking in specifics. Ujjivan’s response is here too.

My suggestion to these industry insiders is that while their exasperation may be understandable, it may not still necessarily be correct.

One should welcome such studies – no matter how sloppily researched they might be (in their eyes) – as important ‘checks and balances’ on their march to create bigger and more sustainable financial inclusion.

After all, one did not have to have the majority of sub-prime loans go delinquent for it to have systemic impact. Securitization and higher leverage played their part too, no doubt. In fact, the level of scrutiny on MFIs – the loan originators – should rise substantially once securitization of microfinance loans picks up.

It is good to have some one warn about the possibility of risks as long as it remains a possibility and not a reality.

In this context ,the reports of a critic on KIVA and the response of the KIVA are both refreshing.