India small loans: drying up ?

ICICI Bank is said to be withdrawing from lending small amounts (up to Rs 30,000) to sub-prime customers in India. This is seen as a response to press reports and judicial action regarding excesses their loan recovery agents have engaged in. ICICI is reported to have closed down 100 outlets focused on such small borrowers.

Citibank has also tightened its processes for lending small amounts. It requires face to face interaction for every potential customer and a rigorous analysis of cash flow. They suggest that customers should ensure that monthly instalments on loans should not exceed 70 to 80% of their surplus income.

There has been a buzz recently about micro finance in India and how it can bring about financial inclusion. However, current 30% loan loss ratio in small loans is seeing fair amount of panic in the sub prime lending market. Coming back to first principles - a bank/finance company should lend money to only those who show strong signs of being able to pay back. Your local money lender knows that. If he is unsure, he knows how to extract the money - a process that is not easily transferable to the formal sector !