Tyler Cowen notes that Microloans May Work, but There Is Dispute in India Over Who Will Make Them. He looks at one microlender in particular, Spandana:
Spandana borrows from banks, has about 2,000 employees and deals with about 800,000 loan recipients. The resulting economies of scale make possible lower interest rates. Spandana has been lending at interest rates of 10 to 15 percent a year, while other Indian microlenders may have rates ranging up to about 30 percent a year. Traditional moneylenders receive 5 or 10 percent a month or more. It is no wonder that Spandana has grown.Spandana seeks to earn a profit through higher repayment rates. Unlike the moneylenders, Spandana lends to small groups of 5 to 10 people rather than to individuals; each member is liable if other group borrowers do not repay. The carrot is that good borrowers become eligible to receive higher sums.
Contrary to some exaggerated claims made on its behalf, microfinance does not generally allow women to establish financial independence from their husbands. Women are the ones who show up to borrow and repay the money. But I polled three groups of Spandana borrowers and found that usually the money went to a business of the husband, not the wife.
Spandana insists on payments every week, if only to ensure that the borrowing family is fiscally responsible. But microlending does not always feed into a new business. No matter how the loan is described on paper, many families use the money to finance the purchase of a new motorbike or pay the family doctor. These loans will increase as more Indians come within reach of modern consumer society; Spandana realizes that such uses are no less important than creating businesses. In some cases, microfinance allows people to refinance loans with private moneylenders and thus go deeper into debt. But more often I heard stories of how Spandana let Indian families break free from the expensive private lenders.
Naturally, there is some backlash, as “not all Indians have accepted the future of their country as an open commercial society with winners and losers.” In fact, “the real problem with microfinance is suddenly clear: the lenders are now large enough and public enough that they become political targets.”