Bubble Controversy Simmers

Microfinance Focus just posted a fine pair of opinion pieces on the risk of microcredit bubbles in India and what to do about it.Vijay Mahajan and P.N. Vasudevan, Indian industry insiders, describe recent steps taken to prevent bubble inflation:

This year, around 30 leading [microfinance institutions] that accounts for around 85% of the Indian market have come together to form Alpha Micro Finance Consultants P Ltd. Alpha will help get the credit bureau services made available to the MFIs in the country....Alpha intends to engage 2 bureaus; including an investment in one of them as a mark of its commitment. To bolster the rollout of this initiative, Alpha has established a partnership with the Omidyar Network and the IFC. IFC will provide technical support to Alpha as well as member-MFIs in getting themselves technically ready to be ‘bureau ready’ so that they could use this data base to get a full idea of a client’s total indebtedness and credit behavior before taking a call to lend further.Of course, Alpha recognizes that a credit bureau is not a solution in itself. After all the sub-prime crisis in the USA was not due to lack of data. To optimize the benefit for the industry through this engagement with credit bureaus, the [institutions] have come together to create an association, Micro Finance Institutions Network (MFIN).MFIN has formulated a Code of Conduct; which will require member-MFIs to adopt certain processes and be subject to certain limitations that will limit over-lending to a borrower.

Daniel Rozas has refined his earlier analysis of bubble trouble signs. And he has joined with Sanjay Sinha, director of the Indian microfinance rating and consulting agency M-CRIL to comment on the industry's move to regulate itself:

...MFIN’s recent announcement to limit MFI lending to no more than three loans and a maximum combined amount of Rs 50,000 ($1,000) per person is a big step in the right direction. This limit, if it is respected by the signatory parties, will no doubt slow growth, most notably in already saturated regions. But with the high growth rates currently enjoyed by top MFIs along with the broadening of their national presence, sacrificing some part of that growth is a small price to pay for insuring against the downside risks of unbridled growth. Indeed, this could be said to be the moment of arrival for Indian microfinance---a maturing smarket that is implementing appropriate controls to insure long-term sustainability while continuing to expand its outreach to millions of still-unserved poor. Surely now we could put aside our critics’ hats and stop worrying?...Unfortunately, old habits die hard. We welcome the efforts of the leading MFIs and hope the overlending limits they will be implemented quickly. However, we are somewhat concerned about the long-term viability of the framework that is being set up. Self-regulation is notoriously difficult and fickle. Current market conditions certainly create incentives for leading MFIs to comply with MFIN’s standards, but situations change quickly and memories fade fast, while the business imperatives to maintain or grow market share never let up.......what makes MFIN’s work particularly difficult is that its present objective---to prevent overlending---is a long-term one. Much like the assets and liabilities of MFIs, the impetus and purpose of self-regulation must also be matched; otherwise enforcement can prove especially difficult.

They close with some interesting suggestions for bolstering self-regulation.