Wednesday, September 02, 2009

MicroFinance in India - Just a Giant Ponzi Scheme

Friends know that I think Microfinance will be India's subprime; the only difference is there is no way any institution is going to repossess any assets from the demographics and geographies where microfinance is prevalent in India. They can try, but they will fail.

In India, microfinance has become a giant ponzi scheme. The asset values are supported by appreciating expectations. As more investors and liquidity are sucked into the scheme, the resulting surging values validate high expectations, which prompt more foolish investors to join the party. This sort of bubble ends when there isn't enough liquidity left to feed the beast.

I feel sorry for whoever is left holding the bag at the end of this ride.

The secret of the MFI "miracle" in India is that default rates are a direct product of the issuance rates. It appears that borrowers are not defaulting because of the pervasive rolling over and maturity extension of debt as they fall due. If any financial institution is able to grow its loan portfolio, roll over old debt, and extend maturity of debt, that institution can hide bad loans and defaults from foolish investors. MFI leaders will not do so because they benefit as much as any other party during the bubble and won't be holding that bag at the end of the ride ... I guess it takes too much courage to get off the tiger once it starts running.


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