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In India, warnings of a microfinance bubble

Lending to the poor has proved so profitable in India that microfinance institutions saw their loan portfolio jump from $252 million to $2.5 billion in two years, raising fears of a subprime-like microfinance bubble.

By Correspondent / June 30, 2010



Yadamari, India

When Gajendra and his wife Marigamala want a loan, they are spoiled for choice in this village six hours from Bangalore.

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Five microfinance institutions offering small loans to the poor have set up shop here in the past five years, and at least two smaller unregistered ones offer money as well. The couple has taken loans from four of them, totaling 50,000 rupees ($1,000). With private microcredit lenders, unlike a bank or savings group, says Gajendra, “you just need a ration card and a photograph.”



Never has credit been so easy for some in the villages of Andhra Pradesh. The southern Indian state is at the epicenter of a decade-long boom in microfinance lending, a system of small loans so successful in aiding the poor that its pioneer, Muhammad Yunus, won the Nobel Peace Prize in 2006. That boom has intensified in India in recent years, transforming a largely nonprofit sector into a destination for private equity investors drawn by high returns and resilience despite recession.

Microfinance institutions (MFIs) watched their loan portfolio in India jump from $252 million to $2.5 billion between 2005 and 2009, according to data compiled by Sa-Dhan, an umbrella group for the sector. Last year alone the number of borrowers jumped 59 percent to more than 22 million people, and loan portfolio grew 56 percent. When including government-supported microcredit programs, the sector overall grew to more than 70 million borrowers and a $7.5 billion market.

But the spectacular growth and the rush of private capital into private MFIs – microfinance comprised 40 percent of equity deals in India last year – have some experts worried about a subprimelike bubble. The expansion has been too large, too fast, and too geographically concentrated, critics say, pointing to incidents of mass default in pockets of the country.



“Once irrational exuberance takes hold, it is difficult to puncture it until it is punctured,” says Sanjay Sinha, managing director of Micro-Credit Ratings International Limited in New Delhi, referring to the subprime housing crisis that triggered the US recession. A March report from the Consultative Group to Assist the Poor (CGAP) found private equity valuations for Indian microfinance were six times book value, and three times the global median. Excess capital flows were driving overvaluation, the report said.

Last year, overheated microfinance markets led to repayment crises in Bosnia, Nicaragua, Morocco, and Pakistan, Mr. Sinha notes, which forced some MFIs to close shop. “There is a global exuberance about microfinance – a flood of money without the infrastructure to distribute that money.”

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