Devfinance: Analysis: Is There a Microfinance Bubble in South India?

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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/