Real Substance on “Credit Bubble” in India

On Microfinance Focus, from Daniel Rozas, who "worked in the US mortgage finance market for most of the past decade":

...even if one accepts the existence of a significant microfinance bubble in South India, that doesn’t guarantee that Andhra Pradesh or any other geographic area is bound to have a crisis. However, I would argue that these areas show vastly increased sector-wide risk, and thus, significant probability of a large-scale crisis. In fact, the Krishna district in AP already had a repayment crisis in 2006, and though many attribute it to political interference, a number of voices have pointed out that politicians were tapping into existing borrower resentment towards the MFIs---after all, it’s hard to inflame a happy crowd. Moreover, among the other countries with high microfinance penetration, Bosnia and Nicaragua are already undergoing repayment crises. Given these examples, risk managers should heed carefully the community aspect of microfinance, which makes the sector so effective during normal times yet can also turn what otherwise would manifest as default spikes into en masse defaults that can engulf entire countries. The normal rules of risk management don’t apply then---of all their problems, the one US banks don’t have to deal with is heavily distressed American borrowers taking to the streets demanding cancellation of their debts.As I had stated earlier on, it is impossible to prove that a bubble exists while one is still in it---the best one can do is point to data that suggests it may be happening. I can’t predict whether the microfinance bubble I believe exists and continues to grow in Andhra Pradesh and other south Indian states will deflate quietly or burst spectacularly. The outcome depends partly on luck and exigent circumstances, and partly on the actions of the MFIs themselves. In their pursuit of growth, many MFIs have continued to add large numbers of new customers in Andhra Pradesh and other highly saturated regions---I believe that is irresponsible. While rapid growth in the north is a commendable strategy for continuing expansion of financial access, pursuing the same in the south (with the exception of remote, still unserved areas) puts short-term gain not only above the long-term financial soundness of the sector, but, more importantly, above the long-term interests of the very poor the MFIs are seeking to serve. The spark that sets off a large-scale delinquency crisis can be anything and could come at any time---a rapid drop in economic growth, a populist political movement, a religious decree, or a collections effort gone bad. One can’t control the spark, but one can control how much fuel that spark can ignite.