Threat of Microfinance Defaults Rise in India as SKS Plans IPO

Tuesday, June 15, 2010

June 15 (Bloomberg) — Savita Ramesh Rathore stood at the door to her dimly lit workshop in Mumbai’s Dharavi slum, filled floor-to-ceiling with bundles of old clothes, and tallied up the cost of her son’s wedding last year.

“Jewels, clothes, food, the town hall,” said Rathore, 50, who makes towels from discarded clothes. She borrowed 30,000 rupees ($645) from moneylenders charging 60 percent interest and took additional loans from friends to pay for the wedding. Three months ago, she got a 10,000 rupee loan from urban lender Hindusthan Microfinance Pvt. to repay some of that debt.

Rathore is one of 25 million Indians who have taken so- called microfinance loans, often without adequate documentation or collateral, according to Micro-Credit Ratings International Ltd. As Hyderabad-based SKS Microfinance Pvt. plans to become the first such lender to go public in the country, an industry credited with helping alleviate poverty may come under pressure to tighten loan standards to avoid a pile-up of bad debts.

“Globally, microfinance is showing characteristics of the western financial markets before the collapse,” said Sanjay Sinha, managing director at Micro-Credit Ratings in New Delhi. “In the U.S., homeowners were given loans at 120 percent of the value of their properties. In rural India, people are being lent to at 150 percent of the value of their enterprises.”

The implosion of the U.S. market for subprime mortgages to people with poor credit histories helped trigger a financial panic and almost $1.8 trillion in losses and writedowns at financial institutions worldwide.

Source: Bloomberg BusinessWeek (link opens in a new window)