… that lower interest rates were possible all along!
India’s embattled microfinance industry has agreed to cap interest rates on its loans in southern Andhra Pradesh state at 24 per cent, as it seeks to counter an intense political backlash against the sector. …
Previously, the industry insisted its high interest rates were needed to cover the cost of outreach to so many small borrowers. However, it has decided to cap the rates in a bid to reduce antagonism from Indian policymakers, who are increasingly uncomfortable with the large profits and personal fortunes being amassed in an industry ostensibly dedicated to alleviating poverty. (ft.com)
And in The Hindu:
“We’ve made several concessions because we’re under duress and not because we want to. It is against our model, but we want the sector to survive. Mr Gopalan completely understands our situation, but he has not let us off the hook,” said Mr Vijay Mahajan, President, MFIN.
(Mr. Gopalan is a key official in the Indian Finance Ministry.)
Economic sociologists have always known that markets follow the political market rules. Try as they might, CGAP and others have not succeeded in creating microfinance markets which follow neoclassical economic theory – competition will push interest rates down to marginal cost, borrowers and MFIs will borrow/lend rationally, non-regulation will lead to efficient maximisation of benefit for all – despite the effective non-regulation of Indian microlending and the commercialisation of the sector.
Apparently MFIs have consistently been overcharging and under-developing their borrowers. If they now – when they must – can cut rates, why have they not done so before? (I already noted this after the initial 0.5 to 2% rate cut two weeks ago.) Collusion and market imperfections may explain part of it, but the political constitution of the market now is obvious as the key factor in setting the price for microcredit. I hope that the drive for sustainability – of borrowers’ livelihoods, not MFIs’ profits – will continue. It will take more messy regulation, and less glossy theory.
(phil)
governancexborders.com 
7 comments
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November 5, 2010 at 14:50
milford bateman
Really excellent posting Phil. You really hit the nail on the head with your dicussion of the MFIs now agreeing to lower their interest rates. They seem to be claiming that it is to ‘help the poor a little more’ but its funny how they found no moral problem keeping interest rates as high as possible before the current crisis in order ‘help themselves’. Interestingly, in the 2006 precursor to this crisis, the main MFIs then (Spandana and SHARE) also undertook to lower their interest rates, from 31% and 28% that prevailed in the 2002-2006 period, to 28% and 24%. Would be interesting to find out if this took place? Or was it simply a presse release and then ‘business as usual’? I read that when reporting to the AP government last week they all registered much higher interes rates than they had publicly acknowledged in their advertisements and press releases. So did interest rates quietly rise again after the last ‘mini-crisis’? Do you have any data on these points arising from your work and contacts in AP?
milford
November 5, 2010 at 16:59
philmader
What I do have is a data sheet compiled by APMAS (Hyderabad-based SHG support NGO) a while back, when they checked the actual payments made by borrowers in some towns. The range of normal annual EIRs is 26.6 to 40.7%, though there are outliers of 58.6 and even 82.5% (all to well-known MFIs).
How the rates have developed over time is indeed an interesting question for the political economy of this case, and your theory about incremental rise after crises seems plausible to me. Perhaps rates were also “shifted” into fees and loan insurances. I will ask my contacts on the ground about this ASAP and let you know what they know.
November 5, 2010 at 21:42
Fehmeen | Microfinance Hub
Most economic theory works only in books, as proved by interest rates in the microfinance sector and the global financial crisis. I’m not surprised SKS was able to reduce it’s rate by 2% , and I think it would have been better PR if the decrease had been attributed to efficiencies gained by massive capital inflow. Bank Compartamos reduced it’s rates drastically after their IPO as well – they cited policy changes as the reason.
November 8, 2010 at 15:45
milford bateman
Fehmeen, could you provide some evidence to back up your claim that Compartamos ‘drastically’ lowered its interest rates after the IPO? I understand from a number of sources working in Mexico that this was not the case at all. milford
November 14, 2010 at 21:59
Fehmeen | MicrofinanceHub
Mr. Bateman,
Here’s the link: http://microfinance.cgap.org/2009/06/25/why-are-compartamos-interest-rates-dropping-was-buying-their-stock-a-good-deal-and-other-tidbits/.
November 15, 2010 at 19:21
High Interest Rates – Problem in Microfinance | Microfinance Hub
[…] seen as a damage control exercise, even though the move was said to be voluntary. However, it makes one wonder why the extra 2% had been there to begin with, and how many other microfinance institutions may have been doing the […]
February 14, 2011 at 17:38
IPOs in Microfinance – Introduction and Issue of Interest Rates | Red Cloud Money Blog
[…] SKS is not directly implicated in these reports but the incidents added fuel to the IPO storm. It is also worth mentioning here that the Indian state-government ran a rival shelf-help group in the province of Andhra Pradesh [7] so politico-economic conflicts cannot be ruled out. Soon afterwards, SKS voluntarily lowered their interest rates by around 2%, but the move was not entirely welcomed. […]