MFIs Wary of Housing Loans over Default Fears

Friday, December 4, 2009

Bangalore: Concerns of defaults are holding back microfinance institutions, or MFIs, from a full-fledged expansion into home loans even as they seek to turn their clientele of poor borrowers into consumers and compete with commercial banks.

MFIs, established mainly to lend small sums to the unbanked poor to help them earn a living, say there’s potentially a huge demand for home loans among their customers. At least two of seven prominent MFIs that Mint spoke to have started experimental lending for home purchases to test the waters while the rest are hesitant.

“This is unsecured lending. Risks are too many,” said a senior official at SKS Microfinance Ltd, India’s largest MFI, who didn’t want to be named. “It’s a different and a difficult ball game. We do not know yet how to price it.”

If defaults pile up, it could be the equivalent of the US banks’ subprime crisis for micro lenders, he said.

The official added: “We need to be very careful as defaults would be high. We do have a demand. Still, we need to work out how to go about it. We are still working out the legalities …and have involved sector experts.”

SKS will launch a pilot programme of home lending, but not in the next two-three months.

Source: LiveMint (link opens in a new window)