Micro- or Predatory-Lending?
In today's Wall Street Journal, an article appeared about profitable micro-lending. The story focuses on the pioneer of a more efficient model of micro-lending in India being able to cut costs and capitalize better on the high repayment rates of micro-borrowers. He has thus turned microlending into a profitable enterprise. One of the main financiers of his efforts declared this brand of microlending to be lower risk and higher return.
If the risk is so low, shouldn't the microlenders charge a lower interest rate to their customers? Otherwise, should we not conclude that this is a thinly veiled predatory lending practice? Citing "benefactor fatigue", the article suggests that this is a good alternative to more traditional forms of microlending. The ability to generate profits is good, since it suggests that the model is sustainable. Should they not have set up the institution as a mutual (credit union, e.g.) to eliminate return on equity provided by large for-profit banks?
ICICI Bank Ltd., India's largest private-sector bank in capital, has gone so far as to give Mr. Akula an open line of credit. The bank says its more than $10 million in loans to SKS have been low-risk and give it a slightly higher return on capital than it gets from its corporate borrowers.
If the risk is so low, shouldn't the microlenders charge a lower interest rate to their customers? Otherwise, should we not conclude that this is a thinly veiled predatory lending practice? Citing "benefactor fatigue", the article suggests that this is a good alternative to more traditional forms of microlending. The ability to generate profits is good, since it suggests that the model is sustainable. Should they not have set up the institution as a mutual (credit union, e.g.) to eliminate return on equity provided by large for-profit banks?
posted by Mahmoud El-Gamal at 6:33 AM
1 Comments:
You're leaving out the cost of processing and data management in your evaluation. This return is high, but the loans are often times in $10.00 increments. The return on such a loan at 16% would be $1.60. To manage this data for a couple of years, do customer support, etc. is extremely low margins. I suspect the total cost of ownerrship and total lifetime profits from each customer is quite low. This I think is radically different from loaning $100,000.00.
When you look at the article, it talks about only having a $10M fund. If this was truly predatorial and had such guaranteed high returns, it seems quite sensible, that with a return that is higher than the stock market running return that people would be flocking to this area.
I'd like to see a lot more facts on the actual profit margins before judging on this area. I know too many organizations which are looking to this model and rates, but doing this in a non-profit fashion.
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