It seems that their desire for a financial return made them cut corners, however, leading them to make loans without also providing financial management advice (which Grameen does). This oversight has led to some people not being able to repay their loans. Some of these people then took out other loans to help service the original loan, with a vicious debt spiral taking hold in a number of cases. There have been suicides and abscondings. These led to the politicians getting involved, urging borrowers not to service their loans.
There also seems to be a problem with the interest rates charged. I'm not a complete expert on Grameen Bank and its levels of interest, but this story mentions that SKS Microfinance - which is India's largest microlender and which in August listed on the Indian stock exchange, raising $350 million - has "reduced its interest rate by six percentage points, to 24 percent". Seems a little high, akin to what Westerners pay on their credit cards and hardly an indication that the lender keeps the borrower's best interests in mind when giving out loans.
The whole scenario is just extraordinary. Grameen Bank was established by teacher Muhammad Yunus as an alternative to village loan sharks, who are in the present case expected to retake the initiative.
The collapse of the industry could have severe consequences for borrowers, who may be forced to resort to money lenders once again. It is tough to find a household in this village in an impoverished district of Andhra Pradesh that is not deeply in debt to a for-profit microfinance company.Grameen Bank's repayment rate is in the order of 97 percent and, as far as I know, it has never been singled out for comment on the basis of the kinds of spectacular non-performance that are emerging in India now. No suicides. No abscondings. But also it's a not-for-profit enterprise, and was established in order to provide a service, on humanitarian grounds, to those unable to viably raise capital in any other way. It was designed to break the cycle of poverty in Bangladesh. The new Indian microfinance companies appear, rather, to have been established in order to generate a return for shareholders. Corners have been cut and the whole house of cards is now threatening to collapse.
Grameen was a true "social enterprise" and it's extremely telling that the reporter, when using this label alongside the new types of companies operating in India, places it in inverted commas.
The "crisis has been building for weeks, but has now reached a critical stage" and "is likely to reverberate around the globe" causing disruption in other financial markets, most of which are just now recovering from the global financial crisis of 2008.
"From little things, big things grow." This Aussie adage cuts both ways, it seems.