Selling loans as a product: US Mortgage market and India Microfinance

If you are not a banker it’s difficult to visualize loans as a product that everyone is pressured to sell on the banking side of the transaction. This insight came up during a discussion with some  friends involved in pioneering  microfinance in India.

[Note: This post from October 25, 2010 was updated on May 31, 2021 for formatting issues.]

Apparently private equity has got involved in microfinance in India and huge money is being pumped in. Except that microfinance is about the poorest folks who really are not able to access regular banks. Now the pressure to sell loans is high and more and more loans are being made that should not be made. Alongwith loans is the pressure of recovery leading to huge stresses in rural society in India.

The US mortgage  mess is rooted in the same kind of thinking, ie “sell sell” loans to anyone to meet sales targets. As a result of this kind of  high pressure “selling” of loans to unqualified borrowers there is untold misery for defaulters, those who bought the debt instruments and now the foreclosure mess.

Probably whenever we try to sell anything – defined as something that consumers have to pay immediately or later- we need to reflect. Reflect on whether the consumer is able to pay and capture the value of the product.  This goes for all kinds of services like loans,education,healthcare etc. A loan for a house should get the homeowner  the home, education should help the student earn and pay back the loan, health insurance should deliver healthcare and its benefit to the patient. In hindsight,sacrificing some dubious home loans in the US might have made the world a different place.

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