From times immemorial banking has been a fantastic business. Ask the Marwaris and the Chettiars.
It is a simple business too. Borrow money at 3%p.a. lend it at 6%p.a. and keep the 3% margins. If I am not wrong it used to be called the 3-6-3 rule of banking.
This rule said borrow at 3%, lend at 6% and play Golf at 3pm.
Well it is still the case. Look at the profitability of Hdfc, Sbi, etc. However banks are no longer happy with a measly 3% margin. They need more. So they look for various products, tools, clients, and try to make money.
In the US they called it NINJA loans. People who had No Income, No Job, but aspiring to buy houses with borrowed funds. A derivative of that was created in India.
The local moneylender was called names (he borrowed from the villagers, added his margin and lent to villagers). He knew the borrower, knew the capacity to repay, had a moral / social / even physical control over the borrowers.
In came the new fangled Micro Finance Institutions. People thought “wave the MFI wand and poverty will disappear in India”. Well the world loved it. Private capital flowed in. They went where the PSU and pvt sector banks REFUSED to go. They were the new darlings. Then the problems started….read on:
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