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Indian Microcredit Industry About To Collapse?

Topics: Editorial & Opinion | Add A CommentBy admin | November 17, 2010

In spite of the feelgood vibe associated with microfunding for the economically challenged people of the world, no-one’s going to be singing “Tiny Bubbles” if India’s massive microlending industry bubble bursts.

Even with microlending, there
are always strings attached.

Wow. Just when I had stopped worrying about how the collapse of Ireland’s economy might trigger the broader collapse of the global economy (it turns out Ireland’s economy isn’t dead, it’s just resting ), now I have to worry about the collapse of India’s economy. After watching America’s banking system get gutted by smart rich guys loaning tons of money to people to buy houses they couldn’t afford, SOMEONE should have noticed the potential for the same to happen with the massive microcredit industry in India. The parallels are actually rather remarkable, except the consequences are much more dramatic. This Globe And Mail piece politely refers to how the poorly-regulated microloan industry in India has resorted to “usurious interest rates and coercive means” to operate. Meaning they’ve apparently been operating much like the local loan sharks everyone was happy to see them replace. This has led to suicides by microcredit-bankrupted individuals who are now being urged by Indian legislators to “strategically default”. Which then gives the banks a fright, because they’re exposed to the tune of $4 billion on all of this lending. The tragic thing on the human end of this scenario? The worst of these overextended borrowers who are choosing suicide as a solution may only owe as little as $2,000. Too bad the Gates Foundation and others didn’t speak up sooner about how the microcredit model was so flawed. For a refresher on how this sort of crisis can play out, see the graphic below.

For the full story, see The Subprime Primer.