POVERTY: India's Microfinance Crisis Not Threat to Banks

ERIKA KINETZ
MUMBAI, India November 19, 2010 (AP)
India's microfinance repayment crisis is not a threat to banking system's stability

A steep drop in microloan repayment in India does not threaten the health of the nation's banking system, analysts and regulators say.
Many small borrowers in Andhra Pradesh state, which accounts for about a third of India's microlending, stopped repaying their loans after a government crackdown on unscrupulous lending practices that allegedly contributed to dozens of suicides.
Now the crackdown on microlending — small loans typically no more than a few hundred dollars — seems to be spreading. Orissa state is also examining microfinance lending practices and wants to cap interest rates charged to borrowers, state finance minister Prafulla Ghadai told reporters Friday. The Reserve Bank of India is conducting its own review of microlending practices as well.
India's commercial banks are the main source of financing for microfinance institutions, prompting fears that loan defaults could reverberate through the banking system, causing instability — a concern regulators and analysts say is unfounded.
"There is no implication for the stability of the financial system," Reserve Bank of India governor D. Subbarao said at the bank's last policy review, in response to a question about microfinance institutions, or MFIs. "On a systemic level, the MFI issue is not likely to have any implications."
Indian banks in the fiscal year ending March 2010 had up to 101.5 billion rupees ($2.2 billion) in loans outstanding to microfinance institutions, about twice as much as the prior year, according to the National Bank for Agriculture and Rural Development.
While banks are an important source of capital for microfinance institutions, microfinance institutions account for less than 1 percent of the banking industry's outstanding loan book today, analysts say. That means even if the entire sector defaulted — an unlikely scenario — banks could absorb the losses.
"The banking sector is well protected," said Angel Broking analyst Vaibhav Agrawal. "It's not that big a deal."
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