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India's $5 billion microfinance industry faces backlash over profits

The role of profit-driven companies in India's microfinance industry is raising concerns about its social mission.

By Correspondent / November 17, 2010

Tairabi Pathan who took a loan of rupees 10,000 ($220) from a microfinance company to start her own business, arranges her goods for sale at the side of a road in a slum area in Mumbai, India, on Oct. 26.

Danish Siddiqui/Reuters

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New Delhi

Microfinance, hailed as a silver bullet to uplift the poor, has grown into a $5 billion industry in India. But a political backlash against strong-arm lending by profit-driven companies has left some lenders struggling to stay afloat, raising questions about the industry’s rapid expansion and the dilution of its social mission.

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Industry associations warn of a liquidity crisis comparable to the US credit crunch in 2008 as banks cut off credit lines to microfinance institutions (MFI) that depend on outside funding. An industry lobby group said Tuesday that lenders were seeking $221 million in emergency loans, according to Bloomberg News.

Other lenders are less exposed. Some collect deposits and make loans within poor communities – a model known as "self-help" groups – though these groups also borrow from banks to increase their pool of capital. Mohammad Yunus, founder of Grameen Bank and Nobel Peace Prize laureate, pioneered this model in Bangladesh.

But the current crisis is roiling the entire industry, says Matthew Titus, executive director of Sa-Dhan, a Delhi-based association that groups over 260 nonprofit, self-help, and commercial lenders. “It’s not only the bad boys that will get hit. Everyone will get hit. People can’t differentiate between who are the good boys and who are the bad boys,” he says.

Has the industry lost its roots?

The backlash began last month in the southern state of Andhra Pradesh, where indebted farmers were reportedly hassled by lenders to repay loans with interest rates of 30 percent or more. Local politicians have linked these practices to a spike in rural suicides, though observers say the link is unproven. State regulators have ordered a freeze on loan repayments where the interest exceeds the principal, which cuts off liquidity for struggling MFIs.

While India has a vast pool of rural and urban poor, many MFIs work in southern states that boast higher literacy rates among women – the usual target group – and greater economic dynamism. Andhra Pradesh accounts for 28 percent of Indian microfinance loans, double the size of the next largest state. This regional concentration has allegedly exacerbated the sharp competition among lenders and led borrowers to take on multiple loans without proper oversight.

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