Pop Goes the Bubble?

Last month, one of India’s flagship mid-size companies went public. SKS Microfinance, I am told, had a bumper IPO that really lifted the mood of the betting public. Fantastic news for SKS and its founder Vikram Akula, I say, and horrible news otherwise. For now, the microfinance bubble will only grow, as it has ended the profit versus public good debate for good in these circles.

As we speak, more and more microfinance institutions (MFIs) are lining up to go public, reminiscent of the way the power and infra companies did in the recent past. A Business Standard article at the end of August pointed out how at least five more firms are lining up to go public. This is not good news for the country and for the financial sector.

When I first heard of the microfinance bit in detail last year, it reminded me instantly of another word: subprime. After all, are they not the same at their core? Lending to those who are not creditworthy in the first place? Lending to the un-creditworthy at higher interest rates? I admit that I might sound ignorant here to some, especially about the work MFIs do to support their lending.

But let us take another look at these MFIs. The same Business Standard article tells me that all of these MFIs are backed by private equity and venture capital fund. And no sir, no matter who tells you what, they are not in the business of public good. They are in the business of profit. And so I ask, do these firms have the capacity to handle a revolt in repayments? A negative portfolio? Let’s be frank here. Right now, what we have is a situation where the economics of the unbanked and financially excluded is working in favor of these MFIs.

Nothing, however, insulates them from a change in the situation. What happens when the poor decide one day not to pay up? Today, with an MFI popping up in every part of the country on a weekly basis, the number of players in this space has substantially gone up. With that, the level of access to loans has also substantially gone up. It’s a situation akin to what the Yanks fell into with their credit cards—use one to pay another. And that is what threatens the MF sector in India as well. Given that there are no established credit bureaus for the unbanked, there is no way to know the entire financial picture of a household, which may have more than a few eligible borrowers spread across a village or two.

These borrowers may use one loan to pay another, and be in a constant debt cycle from then on. That is how a bubble threatens to form in this sector. And the threat is very real. To pay a 24 percent interest on a loan is daylight robbery even when you talk of micro lending. The notion that since the individual amounts lent by MFIs are low enough for a small percent of defaults to not make a huge dent is hogwash.

On-the-field reports are clear in stating that borrowers are being ambushed with loans. The more money that goes out the door in this gold rush, which the SKS IPO has further boosted, the more susceptible is the sector. People would do well to remember the repayment crisis that hit an overseas MFI because of a natural disaster, almost crippling it. It was Muhammad Yunus’ Grameen Bank.

AUGUST SHARK is a once-failed, second-time successful bootstrapper who resides in Mumbai. He can be contacted at august@stumpspeak.com.

Tags:
MFI, microfinance, SKS, Vikram Akula