Microcredit was the talk of the town for much of the past decade, especially in southern Asia, where visionaries like Muhammad Yunus brought small loans to poor entrepreneurs. Yunnis, who founded the Grameen Bank in Bangladesh, even won the Nobel Peace Prize in 2006.
The idea exploded. Everybody wanted in. Banks and companies began making loans, often with high rates of interest; the poor were borrowing money. In India, the total amount of microloans reached about $4 billion. But all this unregulated growth formed what we call an economic bubble, similar in ways to the U.S. housing crisis. And like all bubbles, this one was bound to burst.
Indias rapidly growing private microcredit industry faces imminent collapse as almost all borrowers in one of Indias largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor. ...Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit social enterprises that seek to make money while filling a social need. ...But microfinance in pursuit of profits has led some microcredit companies around the world to extend loans to poor villagers at exorbitant interest rates and without enough regard for their ability to repay. ...
Sound familiar? It should.
Now some Indian officials fear that microfinance could become Indias version of the United States subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy.