August 10, 2006 12:14 AM --------------------------------------
August 10, 2006 Business: Microloans May Work, but There Is Dispute in India Over Who Will Make Them NYT By TYLER COWEN Microfinance is working, but it is often more corporate, more commercial and under more attack than expected. ... Contrary to some exaggerated claims made on its behalf, microfinance does not generally allow women to establish financial independence from their husbands. Women are the ones who show up to borrow and repay the money. But I polled three groups of Spandana borrowers and found that usually the money went to a business of the husband, not the wife. Spandana [a microfinancer] insists on payments every week, if only to ensure that the borrowing family is fiscally responsible. But microlending does not always feed into a new business. No matter how the loan is described on paper, many families use the money to finance the purchase of a new motorbike or pay the family doctor. These loans will increase as more Indians come within reach of modern consumer society; Spandana realizes that such uses are no less important than creating businesses. In some cases, microfinance allows people to refinance loans with private moneylenders and thus go deeper into debt. But more often I heard stories of how Spandana let Indian families break free from the expensive private lenders. Near Hyderabad, in the state of Andhra Pradesh, political opposition to microfinance has begun. State officials have fed negative stories to the media. They charge that microfinance debts have driven some people to ruin or perhaps suicide. They call Spandana's programs "coercive" and "barbaric." They question whether the "community pressure" behind repayment is sometimes too severe. The motives behind this campaign are twofold. The state is not a neutral umpire but rather has its own "self-help group" banking model, which lends at the micro level. Spandana and some of the other private microfinance groups are unwelcome competition. More generally, opposition to money lending has been frequent in the history of both India and the West. Not every loan will have a positive outcome, and it is easy to focus on the victims. Not all Indians have accepted the future of their country as an open commercial society with winners and losers. The government has abruptly shut down the branch offices of some microlenders, including Spandana, without respect for due process. There is talk of legally capping microfinance interest rates at levels — 10 to 15 percent a year — that would put many microlenders out of business. Such regulations would drive the poor back to the far more expensive private moneylenders and also to the state government. Some microlenders have responded by raising their interest rates to reflect the new political risks. Spandana has moved in the opposite direction and is now issuing many loans at the much lower rate of 7.5 percent a year. This may forestall political attacks, but can the company make money in this new environment? The real problem with microfinance is suddenly clear: the lenders are now large enough and public enough that they become political targets. The Indian political authorities must decide whether they will allow new businesses to spread, even when commercialization leads to some disappointments or competes with a state interest. The stipulation that no one can be harmed by progress is a sure recipe for stagnation. Despite these troubles, Padmaja Reddy, the founder and chief executive of Spandana, says she believes her business will grow. I asked Ms. Reddy if she was afraid of having her loans scrutinized by outside academics. She said she expected Spandana programs to pass the test, but she also did not expect every good result of microlending to appear in the numbers. Sometimes access to credit simply gives families a stronger sense of security. For Ms. Reddy, the final proof of the effectiveness of her programs is that "the women keep returning, three, four times in a row." Tyler Cowen is a professor of economics at George Mason University. He is co-author of a blog at www.marginalrevolution.com. He can be reached at [EMAIL PROTECTED] Full Story: http://select.nytimes.com/mem/tnt.html?emc=tnt&tntget=2006/08/10/business/10scene.html&tntemail0=y Copyright 2006 The New York Times Company -- Jim Devine / "In science one tries to tell people, in such a way as to be understood by everyone, something that no one ever knew before. But in economics, it's the exact opposite." --- Paul Dirac [edited]
