By LYDIA POLGREEN and VIKAS BAJAJ

MADOOR, India — India’s rapidly growing private microcredit industry faces imminent collapse as almost all borrowers in one of India’s largest states have stopped repaying their loans, encouraged by politicians who accuse the industry of earning outsize profits on the backs of the poor.

The crisis has now reached a critical stage, and is likely to reverberate around the globe. Indian banks, which put up about 80 percent of the money that the companies lent to the poor, are increasingly worried that after surviving the global financial crisis mostly unscathed, they could now face serious losses. The banks have about $4 billion tied up in the industry, banking officials say.

Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit “social enterprises” that seek to make money while filling a social need. Like-minded industries have sprung up in Africa, Latin America and other parts of Asia.

But microfinance in pursuit of profits has led some companies around the world to extend loans to poor villagers at exorbitant interest rates and without enough regard for their ability to repay. Some companies have more than doubled their revenues annually.

Responding to public anger — and growing reports of suicides among people unable to pay debts — legislators in the state of Andhra Pradesh passed a stringent new law restricting how the companies can lend and collect money.

Local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past few weeks.


Many in Andhra Pradesh have stopped repaying microloans. This woman’s indebted daughter fled, forfeiting her plot of land.


If the trend continues, the industry faces collapse in a state where more than a third of its borrowers live. Lenders are also having trouble making new loans in other states, because banks have slowed lending to them as fears about defaults have grown.

One borrower, Durgamma Dappu, a widowed laborer, took a loan from a private microfinance company because she wanted to build a house.

She had never had a bank account or earned a regular salary but was given a $200 loan, which she struggled to repay. So she took another from a different company, then another, until she was nearly $2,000 in debt. In September she fled her village,leaving her family to forfeit her tiny plot of land.

“These institutions are using quite coercive methods to collect,” said V. Vasant Kumar, the state’s minister for rural development. “They aren’t looking at sustainability or ensuring the money is going to income-generating activities. They are just making money.”

Reddy Subrahmanyam, a senior official who helped write the Andhra Pradesh law, accuses microfinance companies of making “hyperprofits off the poor,” and said the industry was no better than the widely despised village loan sharks it was intended to replace.

“The money lender lives in the community,” he said. “At least you can burn down his house. With these companies, it is loot and scoot.”

Indeed, some of the anger appears to have been fueled by the recent initial public offering of shares by SKS Microfinance, India’s largest for-profit microlender, backed by famous investors like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.

Vikram Akula, chairman of SKS Microfinance, defended the industry’s record, saying that a few rogue operators may have given improper loans, but that destroying microfinance would result in “nothing less than financial apartheid.”

Indian microfinance companies have some of the world’s lowest interest rates for small loans. Mr. Akula said that his company had reduced its interest rate to 24 percent.

Vijay Mahajan, the chairman of Basix, an organization that provides microloans, estimates that only 20 percent have borrowed more than they can afford and that just 1 percent are in serious trouble.

One of India’s leading social workers, Ela Bhatt, who heads the Self-Employed Women’s Association, said microfinance firms had lost sight of the fact that the poor needed business and financial advice as well as loans.

Mr. Mahajan said that the industry was planning to create a fund to help restructure loans.

The collapse of the industry could have severe consequences for borrowers, who may be forced to resort to money lenders once again.

K. Shivamma, 38, took her first loan hoping to reverse several years of crop failure brought on by drought.

“When you take the loan they say, ‘Don’t worry, it is easy to pay back,’ ” Ms. Shivamma said.

Now she owes nearly $2,000. The TV, the phone and the two buffaloes she bought with one loan were sold long ago. “I know it is a vicious circle,” she said. “But there is no choice but to go on.”