India's sub-prime crisis

I have always been sceptical about micro-finance as a development strategy for poor countries. Poverty and debt have a tempestuous relationship that goes back hundreds, if not thousands of years. Micro-finance seemed to be fashionable new word for an old idea.

The micro-finance fad was perhaps strongest in India. However, all is not well with the sector as the Hindu Business online reports.

Imagine that your maid borrowed Rs 30,000 from you, promising to repay within a year from her monthly wage of Rs 4,000. Do you think you could cut Rs 2,500 from her monthly wages, every month? First of all, do you expect her to repay anything? Would you charge any interest on your lending?

Most likely, you might write off the entire amount, considering her child's education and husband's health problems.

Microfinance Institutions (MFI) are in a similar situation. According to the Government of Andhra Pradesh, more than Rs 25,000 has been lent to over 80 lakh poor families. On an average each family owes Rs 30,000. Most MFIs charge 27 per cent interest on loans. Some MFIs seem to use strong-arm tactics in loan recovery, with a few reported suicides. The Andhra Pradesh Government reacted with an ordinance to regulate MFIs. Most likely, the MFIs might be forced to write off a big chunk.

Did you note that 27 percent interest rate? Sounds familiar, don't you think?