India's Microfinance Blues

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By Mac Margolis

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Small borrowing has big problems. Last month's $221 million rescue loan to a group of troubled Indian microfinance companies—with some $2 billion on the line, nearly eight of 10 borrowers were in default—has stirred a crisis of faith in development circles. Critics complain that private banks, lured by the sizzling market in making small loans to the poor, betrayed the neediest by creating a mutant, developing-world subprime monster with 20 to 30 percent interest rates. Now there are fears it could spread.

Microcredit has ballooned into a $38 billion industry, but there's less and less consensus over its efficacy. Abhijit Banerjee of MIT discovered that only about 5 percent of the 7,200 households that took money from Indian firm Spandana Sphoorty Innovative Financial Services managed to launch a business. Studies have reached similar conclusions in Morocco, the Philippines, and Bangladesh. "Most poor people do not have the basic education or experience to understand and manage even low-level business activities," writes U.N. economist Anis Chowdhury. "They are mostly risk-averse, often fearful of losing whatever little they have."

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