The microcredit bubble in India

India has seen a microcredit boom over the past decade. Over 400 million people in India do not have access to banking services. With such a large untapped marketplace, microcredit in India has moved from a few non-profits to many banks flush with money from private investors.

The boom in microcredit has some Indian economists worried. They fear that bubble is forming in India's economy that could burst and have a devastating explosion upon the countries poor.

From the Christian Science Monitor, writer Vaishnavi Chandrashekhar examines the microcredit bubble.

Microfinance institutions (MFIs) watched their loan portfolio in India jump from $252 million to $2.5 billion between 2005 and 2009, according to data compiled by Sa-Dhan, an umbrella group for the sector. Last year alone the number of borrowers jumped 59 percent to more than 22 million people, and loan portfolio grew 56 percent. When including government-supported microcredit programs, the sector overall grew to more than 70 million borrowers and a $7.5 billion market.

But the spectacular growth and the rush of private capital into private MFIs – microfinance comprised 40 percent of equity deals in India last year – have some experts worried about a subprimelike bubble. The expansion has been too large, too fast, and too geographically concentrated, critics say, pointing to incidents of mass default in pockets of the country.



“Once irrational exuberance takes hold, it is difficult to puncture it until it is punctured,” says Sanjay Sinha, managing director of Micro-Credit Ratings International Limited in New Delhi, referring to the subprime housing crisis that triggered the US recession. A March report from the Consultative Group to Assist the Poor (CGAP) found private equity valuations for Indian microfinance were six times book value, and three times the global median. Excess capital flows were driving overvaluation, the report said.

Last year, overheated microfinance markets led to repayment crises in Bosnia, Nicaragua, Morocco, and Pakistan, Mr. Sinha notes, which forced some MFIs to close shop. “There is a global exuberance about microfinance – a flood of money without the infrastructure to distribute that money.”
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It is the MFIs, however, with their quicker processes, larger loans, and more aggressive repayment policies, that have propelled much of the recent expansion. Some have transformed into for-profits as they scaled up in size and profitability.

India's largest MFIs – about 27 of 230 analyzed in the 2009 State of the Sector Report issued by Access Development Services – cover 88 percent of the MFI market. India's biggest MFI, SKS Microfinance, which self-reported 5.3 million borrowers and a return on equity of 19 percent last year, will become India's first MFI to issue a public offering next month.

Most of the sector's growth, however, has been concentrated in a few regions. More than 50 percent of microfinance clients live in the four southern states, which are home to 15 percent of the country’s poor households. By contrast, the states in the central region host 32 percent of poor households but less than 9 percent of clients. 



This skewed growth is most startling in Andhra Pradesh, where average household microfinance debt is eight times the national average. The state of 16 million households had 20 million microfinance clients last year, according to an annual report on the sector.