India’s Microfinance Crisis Not a Threat to Banks

Friday, November 19, 2010

A steep drop in microloan repayment in India does not threaten the health of the nation’s banking system, analysts and regulators say.

Many small borrowers in Andhra Pradesh state, which accounts for about a third of India’s microlending, stopped repaying their loans after a government crackdown on unscrupulous lending practices that allegedly contributed to dozens of suicides.

Now the crackdown on microlending – small loans typically no more than a few hundred dollars – seems to be spreading. Orissa state is also examining microfinance lending practices and wants to cap interest rates charged to borrowers, state finance minister Prafulla Ghadai told reporters Friday. The Reserve Bank of India is conducting its own review of microlending practices as well.

India’s commercial banks are the main source of financing for microfinance institutions, prompting fears that loan defaults could reverberate through the banking system, causing instability – a concern regulators and analysts say is unfounded.

“There is no implication for the stability of the financial system,” Reserve Bank of India governor D. Subbarao said at the bank’s last policy review, in response to a question about microfinance institutions, or MFIs. “On a systemic level, the MFI issue is not likely to have any implications.”

Source: ABC News (link opens in a new window)