A spirited case against the proposition that the Indian microcredit is overheating, from Sucharita Mukherjee and Kirthi Rao of IFMR Capital:
Concerns about an impending collapse a la the US sub-prime crisis in the media seem to emanate largely from opinion rather than fact. The sub-prime crisis was characterised by poor underwriting standards, lack of incentives for mortgage finance companies to originate high quality portfolios as most loans originated were sold down immediately, and overly aggressive rating models assuming very low loss rates, correlations and an unstated assumption of “house prices cannot fall”! The microfinance sector has demonstrated default rates under 2% for more than five years, is financed largely by on-balance sheet loans, and MFIs retain a strong incentive for good due diligence and follow up as they hold first loss equity positions in rated off balance sheet securitisations that are several multiples of their historical default rates.
A couple of weeks ago, I heard something similar from the respected Vijay Mahajan, chairman and founder of BASIX in India: an established model (classical Grameen-style microcredit) has crossed the border from Bangladesh to India, where the potential market is huge. Why should fast growth seem surprising or unhealthy?I take these points of view seriously, think they make a lot of sense, and have no personal experience to contradict them. I would note, however, that financial enthusiasms that turn out to be bubbles invariably have defenders who explain why this time is different. Imagine someone in the U.S. arguing in 2005 that there could be no housing bubble because the housing market is nothing like the tech stock market of 1999, and you get the idea. When there is a flood of capital, precisely how it courses through the economy may matter much less than how much of it is allowed through. The real issue, as John Kenneth Galbraith noted, is whether the growth in India is creating "debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment."
