Subprime-Time?

The microfinance situation in South India has put the industry into crisis management mode. David Roodman offers today's update.

Last week, I spoke to one of the most respected analysts of microfinance in India, and he argued that the sector was now "too big to fail". Roodman cites Daniel Rozas who warns that we ought to at least think about what failure might look like.

All of this has brought up the specter of the US subprime meltdown. Misaligned incentives? Too big to fail? Too much money looking for a quick return? Barbara Kiviat and I weigh in:

"Is microfinance the new subprime? We've been hearing that portentous analogy for years, and now that the Indian state of Andhra Pradesh is riveting the world with stories of loan-shark-style microfinanciers driving borrowers to suicide, the claim has taken on fresh currency. Considering the industry's growing commercialization, it is an obvious comparison to draw. But the most obvious metaphors are not always the most appropriate ones, and sloppy metaphors can easily drive bad policy...while it may be useful to draw some comparisons to the U.S subprime debacle, India's experience is drastically different in significant ways."

See the full piece at the Harvard Business Review blog.