… 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.