Lower growth, shakeout await India's lenders to poor

Tue Jun 7, 2011 11:07am EDT
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By Arjun Kashyap

IBRAHIMPATNAM, India (Reuters) - D. Maniamma, for one, has had enough of microlenders.

After borrowing more than 50,000 rupees ($1,115) over the years to fund her business selling clothes in this dusty village beyond the sprawl of Hyderabad, she says her family was forced by collection agents to sell its motorbike to repay a loan.

"They have asked borrowers to send their kids out (to work) to get money. They sit down at our homes until midnight," said Maniamma.

Maniamma now leads a group of women who are among the thousands in the southern Indian state of Andhra Pradesh that have stopped repaying their loans since a state crackdown on the sector.

Until late last year, Indian microlenders were a key source of credit for poor borrowers and a growth industry that attracted global investors such as Sequoia Capital and George Soros.

A regulatory backlash against aggressive lending and collection practices has since crippled India's microfinance sector, the world's largest by number of borrowers, with funding choked off as uncertainty persists.

However, given the lack of alternatives in a country where hundreds of millions of people remain outside the banking sector, India's for-profit microfinance industry will survive, albeit with tighter regulations, fewer players, slower growth and narrower margins.

"If they are unable to lend, we'll have to go to money lenders who charge us high rates of interest," said Manjula Nageshwar Rao, who used a microloan to set up her vegetable stall in a crowded suburban neighborhood of Hyderabad, the industry hub.   Continued...

<p>Hemalatha (C) and other loan borrowers show pass books given to them by a micro finance company at Ibrahimpatnam, on outskirts of the southern Indian city of Hyderabad, May 19, 2011. REUTERS/Krishnendu Halder</p>