India crisis

Though, up to now, the microfinance in India is quite successful, there was also a crisis happened there. In around October,

2010, in south of India, a place called Andhra Pradesh became the centre of nightmare.Large amount of clients failed to pay back their loan and interest there. But government even supports clients to default rather than help those micro financial institutions. Therefore, several institutions were nearly broken down. Actually,it was reported that over 70 microfinance institutions customers committed suicide because they couldn’t pay back the debt that year. Women even came out on streets against microfinance. Also SKS, one of the biggest of microfinancial institutions had to stop the credit business in Andhra Pradesh. On October 18th 2010, the index of SKS crashed down nearly 100 point within 15 minutes.(Graph 1)In fact, as the microfinance developing fast in India, many international investments were attracted. Since 2008,the equity investment has been doubled and redoubled, (graph 2) and the microfinancial market became a bubble.

To analyze that case, there are some possible causes and problems that may be the reason of the crisis.

First of all, selling loans to clients blindly and over-debt is probably the main cause. Since the money is lending to the poor, who may not even have a job, it’shard for the institution, like banks to get the money back. When the default piles up, the financial crisis is coming soon, just like the crisis happened in 2008 in the U.S.

Secondly,it’s the high interest rate because of high rate of lemon problem, and it’s up to around 20%, some investors are even hard to cover the interest.

Then,some poor people, like farmers are actually doing seasonal retailers’ small business. So they earn money seasonally and may be not able to pay back loans seasonally.

Rapid growth and internal control mechanism lag off can also be good reasons. Since the micro financial market in India was surging forward in 2009, international investment came into the market, which was not only weakening the welfare usage of microfinance but also made the market become a bubble.

When looking back, there are exactly some problem in micro finance system, and it is really a warming bell of microfinance in India and also the whole world. As mentioned plenty of times, microfinance is serving poor people but not the international investors who are actually rich. So there should be some monitor institution to control the operations. Governments and some financial intermediaries can play that role. For money collection system, it can be more humanized. People may be roughly divided into several groups in different kind of way to pay the loans back.