Money trouble

INDIA: Microloans have helped many poor people to start businesses or handle unexpected expenses. This form of money lending once seemed like a good deed, but it has become a road to ruin for many borrowers.

Made popular by Muhammad Yunus from Bangladesh, microfinance allows people without a credit history, and in some cases without even a bank account, to borrow small amounts of money. The borrowers are generally allowed to repay in very small increments. Most microloans are repaid, sometimes with the help of friends, neighbours or a group of borrowers from a community. If one person has a difficult time making payments, the others cover the amount.

India’s microfinance sector was once primarily in the hands of nonprofit organizations, but private companies are increasingly taking over the business. However, their behaviour has reminded many people of US banks before the financial crisis. As microfinance companies seek to make profits, they are lending money far too easily, and charging very high interest rates. As a result, the number of defaults on loans is rising — and so is the number of suicides.

Microfinance companies are lending money far too easily and charging very high interest rates.

Observers warn that India's microfinance system could be heading for collapse, and the government is reconsidering the rules for borrowing and lending. The country’s banks, which provide 80 per cent of the money lent by the private companies, are realizing that regulation may come too late. “We are extremely worried about our exposure to the microfinance sector," Sunand K. Mitra, a senior executive at Axis Bank, told the International Herald Tribune.