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The Rising Threat of Microfinance Defaults

Minimizing microfinance loan defaults
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This article addresses the problem of microfinance loan default in India. It highlights potential issues and discusses solutions to minimize repayment problems.

India is the world’s largest microfinance market, and microfinance lending is expected to surge by about 40% annually over the next few years. With SKS Microfinance going public, the microfinance industry may come under pressure to tighten loan standards in order to avoid bad debts. The article points out that the runaway growth of the industry masks an erosion of lending standards and lack of regulations.

The article also highlights potential conflict between transparency and profitability. In this context, the government has initiated measures to strengthen its monitoring of the sector and assuage repayment problems. The measures include:

  • Waiver for farmers’ debts to the tune of $15 million announced in 2008;
  • Establishment of the Microfinance Institutions Network, comprising the country’s largest MFIs;
  • Creation of a credit bureau by the network to improve risk management and check multiple borrowing.