NPR interviewed David Roodman on the Microfinance Crisis in India.
From the Interview:
India's nearly four billion dollar microfinance industry is facing collapse after politicians in one of the country's largest states called on borrowers to stop paying back their loans. More than five million Indians heeded the call and the crisis is threatening to spread nationally. Host Michel Martin speaks with Senior Fellow David Roodman of the the Center for Global Development and Vijay Mahajan, President of the Microfinance Institutions Network about crisis.
MARTIN: Mr. Roodman, let's start with you. As of the middle of this year, as we understand it, the microfinance industry just in the state of Andhra Pradesh had about a billion dollars in outstanding loans to over six million people. So, what is happening now? Why aren't people paying the loans back?
Mr. ROODMAN: Well, I think the core of what's going on here is kind of like the mortgage crisis in the United States. Micro credit is about giving really small loans, maybe $500, $200, to quite poor people. And this industry exploded in India over the last five or six years. I think in 2003 there were a million loans. Today there are, as you said, more like 29 million in the whole state.
And it seems like the thing just grew out of control and that a lot of people could get credit too easily. And we know how that story goes. MARTIN: So, people could get credit too easily. What happened? A lot of people - the default rate started to go up and then what happened?
Mr. ROODMAN: Well, there was a political intervention. The government came in and shut the industry down in mid October, just about two months ago. And they did that because there were more and more reports that micro credit was being linked to suicides. People were getting so trapped by debt they were killing themselves. How true those reports are is a whole another question. But that became a kind of political dynamic that drove the government to intervene in a very draconian way, really. I think they overreacted.
MARTIN: And David Roodman and Mr. Mahajan, I'm going to ask you this question as well, in this country we think of the micro finance industry as being driven by non-profits, for purposes of the social good, OK? But it's my understanding that in India, most of them are for-profit. I just wondered why that is.
Mr. ROODMAN: The idea is if you want to serve 100 million or 300 million Indians with micro credit, you need money. You need capital to hire people, set up your business, buy the computers, everything else. You need investment. And the only way you can get enough money is if you pay for that capital. And that means promising a share of the profits. So Vijay Mahajan, about, I don't know, five or 10 years ago, was really a leader in this thinking that the micro finance industry needed to go from being non-profit to for-profit in order to attract the capital and serve more people.