Wall Street Journal Also Raises Microcredit Bubble Fears

In an article that was published in tomorrow's(!) Wall Street Journal, reporter Ketaki Gokhale emphatically asserts that "a credit crisis is brewing in 'microfinance'":

Here in Ramanagaram, a silk-making city in southern India, Zahreen Taj noticed the change. Suddenly, in the shantytown where she lives, lots of people wanted to loan her money. She borrowed $125 to invest in her husband's vegetable cart. Then she borrowed more."I took from one bank to pay the previous one. And I did it again," says Ms. Taj, 46 years old. In four years, she took a total of four loans from two microlenders in progressively larger amounts -- two for $209, another for $293, and then $356.At the height of her borrowing binge, she says, she bought a television set. The arrival of microfinance "increased our desires for things we didn't have," Ms. Taj says. "We all have dreams."Today her house is bare except for a floor mat and a pile of kitchen utensils. By selling her TV, appliances and jewelry, she cut her debt to $94. That's equal to about a fourth of her annual income.

Interestingly, one inspiration for my own post on this subject was another dispatch from India.From my desk in Washington (well, actually cottage back porch in Maine), I cannot judge the situation with the confidence of the WSJ reporter stationed in India, so I assert only that bubbles could exist, not that they do. I note that the article's evidence boils down to a few stories and quotes and some exaggeration of the significance of people using microcredit for consumption rather than investment. It reminds me a bit of the WSJ article written by Michael Phillips and Daniel Pearl shortly before Pearl was kidnapped and murdered in Pakistan. Phillips and Pearl correctly reported that the Grameen Bank was having repayment problems and not really coming clean about them---but missed the story that Grameen was in the process of launching thoroughgoing reforms that would soon renew growth. Grameen did not have a meltdown. (Addendum: Ghokale is working for the WSJ in India on a Daniel Pearl Internship.)So I can't tell for sure if the herd mentality has taken over in Indian microcredit, or has merely infected commentators like me wondering if there is a bubble.Still, the former is a possibility worth taking seriously.Hat tip to @tactphil and @impactSP2walden, who tweeted it.Update: Ujjivan, a microfinance institution covered in the story, has posted a dissenting response. (Hat tip to @DefeatPoverty and @MFPrimarySource.) Unitus president Ed Bland has too. And here's SKS founder Vikram Akula, who persuasively demonstrates that the reporting was shoddy.