Is there a role for moneylenders in microfinance?

In catching up on my blog reading after the holidays, I lingered over Rich Rosenberg’s post on whether microcredit is squeezing out moneylenders. In it, he refers to a Wall Street Journal article on the rapid expansion of moneylending in India, and returns to the nagging question of whether this new availability of credit is leading to overindebtedness.

The problem with the overindebtedness question is that there are no good answers. As Jonathan Morduch pointed out a few months ago, we don’t have a good measure of overindebtedness, and even if we could settle on a metric, it likely wouldn’t capture much of the informal household borrowing and saving that goes on. And Rosenberg brings up the problem of getting truthful answers to household surveys if the respondents think the survey is connected to the MFI.

Stepping back, though, the larger question is whether the existence of moneylenders is always a bad thing. For one thing, they give out loans faster, without asking their clients to form groups and serve as each other's guarantors (as microfinance institutions often do). While this eliminates the social pressure that MFIs rely on to ensure repayment, there is a strong need for this kind of fast access to cash (one of the revelations of Portfolios of the Poor). One lender quoted in the WSJ article says he gives out loans "as quickly as an ATM gives money".  When emergencies arise, this is not necessarily a bad thing.