Overheated: The microcredit business model is fighting with bubbles

In India and some other developing countries, microcredits are being added in rows. The strong growth of the industry was largely at the expense of credit quality. The highly prized business model fights overheating and blistering. Private investors, however, need not worry about their microcredit funds.

The principle of microcredit is simple.

The principle of microcredit is simple.

A specialized microfinance institution lends people in the developing world a small amount of money between 30 and 50 euros – and allows the borrower to build an independent existence. Banks do not take on this function because they do not give billions of people access to credit. Private investors are also out of the question because they charge too high interest rates and exploit the borrowers.

The loans from the microfinance institutions are by no means interest-free. Depending on the region and the institute, 30 percent interest after deduction of inflation is also normal. Not surprisingly, the segment has attracted a lot of capital. In parts of India, the market is now completely overheated. Too many loans were forgiven that could no longer be serviced. Only a rescue fund was able to prevent a collapse of the market in the Andrha Pradesh region.

Intrasavings bank estimates that microcredits worth EUR 3.8 billion are outstanding in the region. Six million of the region’s 80 million people would have borrowed money. The repayment was only possible for many of them when new debts were taken out at the same time. However, Intrasavings does not see the market for microcredits in a global crisis. The promotional bank estimates that less than 2% of its self-financed loans will be canceled.

However, the overheating is not limited to India, even if the problem is greatest there. In Ukraine, Nicaragua and the Balkans, too, there are signs of too loose lending at the expense of quality.

Investors who have invested in microcredit funds do not have to worry about their money.

Investors who have invested in microcredit funds do not have to worry about their money.

The funds do not lend directly to people anywhere in the world. Instead, they lend their money to microfinance institutions, in return for which they receive bonds representing the fund’s assets.

For this reason, loan repayments on the part of institutions are not directly received by the fund. Only when an institution becomes insolvent, the fund must also write off. Most of the funds that are popular in Germany, however, are little if at all affected by the current crisis.

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