Analysis: Is There a Microfinance Bubble in South India?

[vikash kumar-3]

By, Daniel Rozas, Microfinance Consultant

By most standards, microfinance is a young sector, and in many countries it
can be said to still be in its infancy.   Yet its continuing spectacular
growth, especially in India, should give one pause – every time promoters
celebrate another multi-million-client threshold, I wonder – how many more
such thresholds are left?  How do we know when we’ve arrived?

This is not a philosophical question – normally, markets send signals.  New
customer demand drops.  Prices fall.  Margins decrease.  However, credit
markets are funny animals – the hopeful, exuberant part of our human nature
dictates that, when presented with the opportunity, we tend to overestimate
our repayment capacities and borrow beyond our means.  And when we can
borrow from one lender to repay another, we can stretch the cycle out even
further.  The market signal gets delayed, while a bubble builds – when the
signal does come, it is in the form of the bubble bursting.  Students of the
US housing crisis can tell you – it is a most unpleasant signal to receive.
I vividly remember the day in January 2007, when I first learned of the
unusual delinquency patterns emerging in the US subprime market – at the
time this affected only a small proportion of loans within a relatively
small subsector of the mortgage market, and few thought then that this
presaged a crisis that would engulf the entire mortgage market, let alone
the global economy.   Yet even though subprime lending had consequently all
but vanished by spring of 2007, it could not prevent the worldwide tsunami
from crashing down nearly two years later.  Such is the nature of bubbles.

The trouble is, determining whether we are actually in a bubble is no easy
task.  A look at the US stock bubble of the late 90s and the housing bubble
of ’04-07 shows a familiar pattern – the eager participants are hypnotized
by the glitter of their apparent success, the “wise seers” seek ways to
explain visible deviations from the norm, while the few lone voices calling
for a time-out are made outcasts of society.  Yet when the bubble finally
bursts, everyone adopts the common refrain:  why didn’t “they” (the
government, the corporations, the media) do something – the bubble was so
obvious!

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Read Complete Article at:
http://www.microfinancefocus.com/2009/11/10/is-there-a-microfinance-bubble-in-south-india/


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