Indian bank collapse possible because of microcredit crackdown

The crackdown on microcredit in India is bringing fears that the country's banking system could collapse. The banks finance most of the microcredit lenders, so the fear is that if the lenders default on the loans the banks will not able to absorb the losses.

Many microcredit borrowers stopped paying back their loans during the government crackdown. India has recently passed a new law that puts a cap on the amount of interest that microlenders can charge.

From this Associated Press article that we found at ABC News, writer Erika Kinetz describes the situation for the banks, and how the newly public SKS Microfinance is faring through the crackdown.

"There is no implication for the stability of the financial system," Reserve Bank of India governor D. Subbarao said at the bank's last policy review, in response to a question about microfinance institutions, or MFIs. "On a systemic level, the MFI issue is not likely to have any implications."

Indian banks in the fiscal year ending March 2010 had up to 101.5 billion rupees ($2.2 billion) in loans outstanding to microfinance institutions, about twice as much as the prior year, according to the National Bank for Agriculture and Rural Development.

While banks are an important source of capital for microfinance institutions, microfinance institutions account for less than 1 percent of the banking industry's outstanding loan book today, analysts say. That means even if the entire sector defaulted — an unlikely scenario — banks could absorb the losses.
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SKS Microfinance, India's largest microlender, said loan collections in Andhra Pradesh, which have been essentially frozen for a month, have begun to improve. The state accounts for about 27 percent of the company's outstanding loans.

After the Andhra Pradesh government's crackdown, SKS was blocked from collecting repayments at over half its village collection sites and 66 employees were arrested or detained by police, SKS spokesman Atul Takle said Friday.

All employees have been released, he said. Since the company restarted collections on November 15, it has been able to access 97 percent of collection sites.