Tuesday, 21 December, 2010

Usury English style = Inclusive growth

In an editorial titled Microfinance and financial inclusion, the Financial Times says, "A crackdown (on microfinance in South Asia) would not help anyone, except perhaps traditional moneylenders and feudal landlords… Microfinance's advantages over traditional sources are that loans are cheaper and free of the social conditions attaching to credit in feudal relationships… As to the charge of gouging, microlenders have small margins in spite of their high interest rates… Evidence suggests the Indian suicides were the result of borrowers taking on too much debt from multiple sources. Credit practices must be improved to prevent this. Lenders should disclose interest rates to stimulate competition. This requires intelligent regulation.

Microfinance brings a crucial service to poor people. Rather than being attacked, it should be helped to do an even better job of assisting them to assert their financial autonomy."

The piece raises a number of obvious questions. First, why do microlenders have small margins in spite of high interest rates? Is it because their overhead costs are high? Or do borrowers default in large numbers? Or are they plain badly run?

Second, if credit practices were improved, would microfinance companies be able to charge the high interest rates? If I knew the probability that a borrower may default, can I still charge him a high rate? For instance, credit card companies in India justify charging usurious interests to all customers with the excuse that credit ratings are unavailable in India (without ever bothering to explain why they haven't developed ratings of their own over decades of operating in India): They cannot do so in civilised countries because credit scores are available.

Third, what does 'financial autonomy' mean?

Finally, why are people committing suicide when overwhelmed by loans? As per FT, microfinance is 'free of the social conditions attaching to credit in feudal relationships.' So what is it not free of? What are those borrowers afraid of? (Let's say you put money into my scheme, which doesn't work out. Now, I'd be sorry about it, but it's quite unlikely that I'd be so ashamed or petrified by failure that I'd kill myself… unless you had some abnormal bodily or psychological hold over me. What hold do these microfinance companies have?)

That South Asian politicians, in particular, and people, in general, are incurably corrupt is truer than the sun's rise in the east. Nonetheless, it does not logically follow that everything they say is to benefit landlords and usurers, more so when microfinance can offer far bigger bribes than the former.

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