Apparently, some microcredit lenders in Andhra Pradesh, India's 4th largest state by population, crossed the fine line between balancing profits and social impact to loan sharking, all in the name of growth. It's easy to see why. Microfinance is increasingly becoming big business, in part because the need is so great, viable models (like those of the Grameen Bank) have become mainstream, and default rates are customarily low relative to profit margins.
And, most of all, people can get rich doing it. SKS Microfinance, India's largest for-profit microlender and backed by famous investors like George Soros and Vinod Khosla, recently floated a $350 million IPO with SKS Chairman Vikram Akula privately selling shares worth about $13 million.
The dynamics (another word for messiness) that accompany innovation and entrepreneurship have a familiar pattern. Early successes lead to refined models that produce ever increasing value to both customers and providers. Almost inevitably, these models are exploited by a few bad apples, sinking the whole concept into question.
Fortunately, all market-based innovations have built-in (although not always timely) mechanisms to clean up the mess. The refusal (or inability) of those receiving microloans to repay has already led to tighter regulatory restrictions and generated questions among policymakers, legitimate loan providers, and their customers. The answers to these questions, and the processes taken to find them, will undoubtedly lead to even better, more effective microcredit models in the future. Unfortunately, the "best" providers of microloans to the poor, which have pulled millions in poverty at least a rung or two up the economic ladder, will end up as collateral damage, at least for a while.
All of this is little comfort to the Indians whose lives have been damaged by unscrupulous lenders. It's a situation that has probably existed since the beginning of time and always will as long as those who have are willing to give to those who need.
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