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Threat of Microfinance Defaults Rise in India as SKS Plans IPO
Businessweek: Microfinance, which provides financial sercices to low-income people who traditionally lack access to banking, is now "showing characteristics of the western financial markets before the collapse,” as people are being lent money at a rate of 150 percent of the value of their small business.
"Microfinance markets in Nicaragua, Morocco and Pakistan have seen default levels climb to more than 10 percent, the threshold that marks a “serious repayment crisis,” according to a February report from Washington, D.C.-based policy and research firm Consultative Group to Assist the Poor. Delinquencies in Bosnia and Herzegovina stayed below that level only because of “aggressive loan write-offs,” the report said.
While there has been no evidence of a “widespread repayment crisis” in India, “a number of industry analysts have highlighted industry vulnerabilities,” the report said. Indian microfinance firms have reported bad-loan ratios of about 2.5 percent on average, Micro-Credit’s Sinha estimated. Actual levels may be higher, in part because some lenders roll over loans to struggling borrowers to avoid defaults, he said.
Runaway growth at microfinance companies masks an erosion of lending standards and a lack of regulation that may help spark rising defaults, said Micro-Credit’s Sinha. India doesn’t have a nationwide system for tracking borrowers’ credit histories, making it hard for lenders to check whether clients have multiple loans."