More Bubble Kerfuffle

Jonathan Morduch blogs passionately on how the Wall Street Journal got it wrong in confidently calling a bubble in Indian microcredit:

The WSJ purports that microfinance clients are being “carpet bombed” by loans. The fact is that the typical low-income person (with a profile like that of microfinance customers) lives a life involving multiple loans: some from informal sources (family, friends, moneylenders) and---if they're available---from microfinance or formal-sector banks. The evidence from Portfolios of the Poor suggests that most people manage a handful of financial devices at any one time, patching the pieces together to get the timing and volume as close to what is needed as possible. This is normal.

This is the most penetrating take I've seen on this little controversy.Jonathan's post makes me wonder if I was too dim before on the ease with which group microcreditors could track borrowers with a credit bureau in order to detect and prevent multiple- and over-borrowing. The essence of group credit is to keep costs and interest rates down by delegating the job of monitoring borrowers onto borrowers themselves. To this extent, group microcreditors are flying blind. But group credit is a technology (in the economist's sense) that largely predates the ongoing revolution in digital technology. Perhaps today we can do better. Microcreditors are increasingly computerized, so that it ought to be possible to bring down the marginal cost of sharing information about clients. (Though I can't resist chuckling at the ASA branch I visited last year in Bangladesh, which housed a brand new HP computer running a high-powered custom MySQL database under Linux---and was connected to the outside world by a printer and a courier. Monthly reports were mailed to the central office. Multiply that by 3,300 branches.)A major prerequisite for a credit bureau is a way to identify people in order to match up records from various lenders and prevent fraudulent use of multiple names. India, for one, has no national ID system. But it has just launched an ambitious project, with Infosys cofounder Nandan Nilekani at the head, to create one. The ID card system will reportedly use biometric technology such as digital fingerprinting. (A bit more on that in Fingerprinting Malawian Paprika Farmers.) As it happens, Karnataka State, site of the WSJ's reportage, has been selected for the pilot. It will be interesting to see how quickly or slowly the national authority IDs the state's tens of millions of poor people---and to see how easy or hard it is for microcreditors to latch on to the system.Separately, N Srinivasan, a leading observer of Indian microfinance, blogs for CGAP on the subtleties of the troubles in Karnataka. "For the large MFIs, the problem is very small, while some small MFIs have a large problem."