India Rocked By Microfinance Crisis
MICHEL MARTIN, host:
I'm Michel Martin and this is TELL ME MORE from NPR News.
The Nobel Peace Prize will be awarded to a Chinese dissident in Oslo tomorrow. China is furious about it. We'll tell you why and what the Chinese government is doing about it in just a few minutes.
But first, to India, where a credit crisis is threatening to ruin a multi-billion dollar financial industry. Microfinance is big business on the subcontinent. More than 29 million loans have gone to low income people in India, mostly women, and the industry is now worth about $4 billion. But now that industry is facing possible collapse after politicians in one of the country's largest states, Andhra Pradesh, encouraged borrowers to stop repaying their loans.
More than 5 million have heeded the call to do that and there are fears that borrowers in other states will follow suit. We wanted to know why, so we called upon David Roodman. He's a senior fellow at the Center for Global Development. He's been following this issue closely. Also with us, is Vijay Mahajan. He is a president of the Microfinance Institutions Network, which represents 80 percent of the microfinance sector in India. In 2009, by the way, he was listed by Bloomberg Business Week as one of India's 50 most powerful people. So, thank you both so much for joining us.
Mr. DAVID ROODMAN (Senior Fellow, Center for Global Development): Great to be here.
Mr. VIJAY MAHAJAN (President, Microfinance Institutions Network): Thank you.
MARTIN: Mr. Roodman, let's start with you. As of the middle of this year, as we understand it, the microfinance industry just in the state of Andhra Pradesh had about a billion dollars in outstanding loans to over six million people. So, what is happening now? Why aren't people paying the loans back?
Mr. ROODMAN: Well, I think the core of what's going on here is kind of like the mortgage crisis in the United States. Micro credit is about giving really small loans, maybe $500, $200, to quite poor people. And this industry exploded in India over the last five or six years. I think in 2003 there were a million loans. Today there are, as you said, more like 29 million in the whole state.
And it seems like the thing just grew out of control and that a lot of people could get credit too easily. And we know how that story goes.
MARTIN: So, people could get credit too easily. What happened? A lot of people - the default rate started to go up and then what happened?
Mr. ROODMAN: Well, there was a political intervention. The government came in and shut the industry down in mid October, just about two months ago. And they did that because there were more and more reports that micro credit was being linked to suicides. People were getting so trapped by debt they were killing themselves. How true those reports are is a whole another question. But that became a kind of political dynamic that drove the government to intervene in a very draconian way, really. I think they overreacted.
MARTIN: And David Roodman and Mr. Mahajan, I'm going to ask you this question as well, in this country we think of the micro finance industry as being driven by non-profits, for purposes of the social good, OK? But it's my understanding that in India, most of them are for-profit. I just wondered why that is.
Mr. ROODMAN: The idea is if you want to serve 100 million or 300 million Indians with micro credit, you need money. You need capital to hire people, set up your business, buy the computers, everything else. You need investment. And the only way you can get enough money is if you pay for that capital. And that means promising a share of the profits. So Vijay Mahajan, about, I don't know, five or 10 years ago, was really a leader in this thinking that the micro finance industry needed to go from being non-profit to for-profit in order to attract the capital and serve more people.
MARTIN: OK, Vijay Mahajan, will you tell us more about that?
Mr. MAHAJAN: Yes. Exactly what David was saying that, you know, I indeed began my life in a non-profit. I used to do micro finance as a non-profit for nearly 10 years and barely managed to reach about 20,000 people and with a very small loan portfolio. And when I thought about it, how can I access, you know, bank credit? There's no way we can grow and reach the millions who needed the credit.
MARTIN: What percentage of the loans right now are not being, you know, repaid and how concerned are you that the whole industry really will collapse?
Mr. MAHAJAN: Well, you know, the repayment rates, which traditionally used to be 98 percent, are now below 10 percent in Andhra Pradesh. Some of us who are already colleting on a monthly basis and also work with the male farmers and so on have higher rates. So the average is about 20 percent.
But, still, vast majority of the weekly repayment institutions are below 10 percent. And with this, they cannot sustain for more than another month or two, because, you know, everybody has costs and everybody has bank loans to repay. So far, no microfinance institutions have defaulted to banks. But another month or two, even that will be a remote possibility.
MARTIN: And I was asking David Roodman, I'd like to ask you this question also, why is it that people aren't repaying? In this country, he was likening it to the mortgage industry collapse here. And in this country it's, in part, because of the recession that a lot of people are losing their jobs and they just don't have the money to repay these loans. Why is this happening in Andhra Pradesh? Why is it happening there? Is it this political move here or are there other factors?
Mr. MAHAJAN: There is some parallel in the sense that people in the first place have borrowed - many people have borrowed more than what their capacity to repay was, in terms of their income condition activities. Most people in India - 93 percent of people who work in India are in the informal sector. They're either sales employed or they're wage laborers. So as it is, incomes are not very high and they're not always steady.
And so if you're over borrowed, then, you know, you can get into a situation where you're not able to repay. But that is something that they're accustomed to. But when local political leaders encourage them not to repay, you know, they tend to feel legitimized in their stand and then it becomes a contagion and spreads.
MARTIN: David Roodman, one issue here is, I'd like to ask you about the whole question of regulation here. You know, this is one of the criticisms that's arisen in the United States is that people say, well, people were able to get these loans, who shouldn't have gotten them? Who really did not have the capacity to pay them back? Is that the same in India and are people saying there should've been some regulatory oversight here? And why wasn't there?
Mr. ROODMAN: It's a good question. In other words, what's the lesson here going forward? How do we prevent this from happening again? And it's a tough question. One big difference between India and the United States is that in India there were no credit bureaus to track what everybody was borrowing. And so, which would've then helped prevent over borrowing.
Now, I should say that didn't stop the crisis here, so they're not foolproof, but it would've been a good first step. The industry has been trying to move in that direction, but India doesn't have a unique ID system, like, we have Social Security numbers. So it's even hard to identify, you know, match up loans.
So that would be one key step is to try to build a system like that. I think there also needs to be some kind of international institutions that brings together all the socially motivated investors who are investing in micro finance and actually trying to help, not hurt things, and get them to think collectively about whether they're putting in too much money sometimes and to slow down their investments.
MARTIN: David Roodman, is it, in part, the case that the government institutions also compete with these private sector institutions too? Is that true?
Mr. ROODMAN: Absolutely. And that's why I think the government overreacted in trying to deal with what the real problem, so that its response became a real problem.
MARTIN: What's the worst case scenario here?
Mr. ROODMAN: The worst case scenario. The worst case scenario is the micro credit in India is pretty much bankrupted, because the state that we're talking about, Andhra Pradesh, is the biggest state for micro credit. And if it completely falls apart, that could destroy the finances of these micro creditors. That, in turn, means that poor people will have fewer options when they need to borrow in an appropriate way.
It can also send ripple effects around the world and really damage the entire global - the entire micro finance industry and have the same effects in other countries.
MARTIN: Well, we've mentioned that the Nobel Peace Prize is to be awarded tomorrow, that one of the, sort of, founding fathers of micro finance, Muhammad Yunus, was awarded a Nobel Peace Prize some years ago for his innovations in this area. So I think, you know, your concern is that other countries will not, you know, pursue this.
Vijay Mahajan, I was asking David Roodman, what's the worst case scenario here?
Mr. MAHAJAN: Well, the worst case scenario is pretty horrible, because India now has a very large micro finance sector, bigger than Bangladesh. Most of it is financed by large banks. It's not through savings. And therefore, you know, if banks get a knock in one state, they're simply going to declare this whole (unintelligible) class as unreliable, unworthy of lending to. So it's going to be a huge setback.
MARTIN: Vijay Mahajan is the president of the Microfinance Institutions Network. He joined us from Hyderabad, which is the capital of Andhra Pradesh. David Roodman is a senior fellow at the Center for Global Development. He joined us here in Washington, D.C. This is an ongoing story and I hope you'll keep apprised of its developments. Thank you both so much for joining us.
Mr. ROODMAN: You're welcome.
Mr. MAHAJAN: Bye-bye.
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