Opining in the Financial Times

On Monday the Financial Times opinion page carried a defense of India's microcredit industry by nine esteemed academics, including four native to India and one to Pakistan. If you have trouble getting through FT's gate, read this earlier version for the Indian Express.An excerpt from the FT version:

To be sure, India’s microfinance industry is not without its problems. Microfinance institutions charge rates ranging from 18 to 35 per cent. This looks higher than regular banks, creating the impression that microfinance is inequitable. But this impression needs to be tempered by the fact that credit card rates are quite similar. The costs of lending small amounts to vast numbers of poor people who lack collateral or credit records are high anyway, which is why they are often excluded altogether from formal credit channels. Microfinance manages to provide some credit access at rates substantially below the informal market, which ranges from 30 to 120 per cent.Other problems in microfinance relate to its rapid growth. Loan officers are given financial incentives to recruit more clients, and may not screen them adequately. Anecdotal evidence suggests over-indebtedness of clients is a problem, while there are also rumours of debt-related suicide. Yet tragic though these problems are, we must remember that rural indebtedness is mostly a problem caused by loans from non-microfinance sources, and, in particular, from old fashioned money lending...When it works well microfinance really can be a win-win. Institutions need to be more diligent in their lending – but politicians also need to be wary. In taking aim at the occasional overstep, they may inadvertently destroy microfinance itself. That would be a disservice to the world’s poor, and their hopes of climbing out of poverty.

Today the FT published two letters in response. One is from Jomo Kwame Sundaram, the U.N. Assistant Secretary-General for Economic Development. It says a lot of things, which the authors of the original piece probably agree with.The other is by me. To tiptoe around copyrights, here's the version I sent in, which is almost the same as what was printed:

In the face of the welter of criticism of microcredit in India, this defense of microcredit is timely. But it misses a larger point. To understand and learn from what has gone wrong, we must view in Indian microcredit not only as an intervention, but also as an industry. Imagine a piece entitled “Mortgages are not the enemy” that enumerated the good things done by mortgages in the U.K. That would ring hollow as an analysis of the problems of the mortgage business and the needed fixes.At its heart, the story of Indian microcredit is familiar: credit grew too fast. For a while, easy money masked and exacerbated the repayment difficulties of some borrowers. Meanwhile, microcredit may well have become the most inflexible kind of credit available to India’s poor, making it most apt—in loan officers’ insistence on prompt, weekly repayment—to force cornered borrowers into acts of desperation such as suicide. The authors are right to take individual suicide reports with salt, for we have little systematic evidence of what is happening in the slums and villages. But by the same token, they cannot be so sure that microcreditors committed no more than the “occasional overstep.”Let us attack the problem of fast growth by slowing the spigots that inflated the bubble. Indian banks should no longer be able to count loans to microcreditors in satisfying the government’s “priority sector” lending quotas. Internationally, public and private investors in microcredit—most of which seek social betterment as well as profit—ought to launch a sort of credit bureau for microcreditors. This would track the borrowings, equity placements, and growth rates of microcreditors and issue guidance about when fresh funds seem safe, and when it would be better for the poor and the industry not to invest.

I'd welcome fresh commentary on that idea in light of recent events.