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Comment by r90 | Hacker News Reader

If SKS microfinance is charging 24% they are a loanshark, period.Rates as high as that are usury and should not be lawful.

I'm of half-Indian and half-European descent and I am always ashamed of my Indian heritage. The Indian people as a collective simply do not know what it means to be humane and have never heard the word solidarity. I don't mean that Western countries are perfect, just that they are lightyears ahead of India.

Civilized countries have laws that protect the poor. Interest rate limits for people (not corporations) are generally and histroically limited to about 8-12%. The US exception caused the subprime crisis, but was compensated for the poor by generous bankruptcy laws.

Also, western countries have bankruptcy laws, social safety nets and a lot of private charity.

Even poort western countries such as Bolivia have a minimal level of solidarity so that no-one should feel that suicide is the only way out.

India, I am disappoint.

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There's no 'general and historical' interest rate limit of 8-12%. Credit card APRs in the United States range up to 30% or so, and payday loans can have APRs of well over 100%. In other countries, rates for products catering to the poor are similarly high - this is just the cost of doing business when extending small amounts of credit to poor prospects with high default rates.

The wisdom of that is what should be debated. Since businesses need to charge high interest rates to compensate for defaults, does mean the poor shouldn't have access to credit at all? Note that that's what effectively happening in Andhra Pradesh, where laws to 'protect the poor' have dropped the repayment rate of loans to under 20 percent, ensuring microcredit there will cease to exist.

Check your facts: http://www.lectlaw.com/files/ban02.htm

E.g. Alabama: ALABAMA, the legal rate of interest is 6%; the general usury limit is 8%. The judgment rate is 12%.

Like I said, it's not perfect, there are many exceptions. The US has devolved quite a bit from the humane society that built it up.

But generous bankruptcy laws still make it possible for Americans to escape high debt. In India, suicide seems to be the only solution for some.

Did you even read your own link? Here's the second (!) paragraph from it:

"But my car loan is higher than that"; "But I'm paying way more than that on my credit cards." That's right! Banks have separate rules. In fact, due to high inflation, in 1980, the federal government passed a special law which allowed national banks (the ones that have the word "national" or the term "N.A." in their name, and savings banks that are federally chartered) to ignore state usury limits and pegged the rate of interest at a certain number of points above the federal reserve discount rate. In addition, specially chartered organizations like small loan companies and installment plan sellers (like car financing companies) have their own rules.

That seems to support the claim that this is a recent departure from the "general and historical" caps on interest rates, though: most states have long had usury laws with interest-rate caps, and national banks were only exempted from them in 1980.

I agree with your bit about solidarity in India, but you might be a bit mis-informed about the interest rates.

The CoF (cost of funds) to SKS is in the vicinity of 12-14%, and the norm is to add 10% on top of that. More middle-of-the-curve MFIs usually charge 30%+.

Loan sharks in villages typically charge 100% and/or servitude, and are more often than not the cause of loan repayment related suicides.

I know my comments have a few upvotes attached to them already, and I don't really see any point in cribbing about karma points anyway.

However, it would be useful to me if the person who downvoted both my comments in this thread were to drop a line explaining why/how I was detracting from the conversation in any way...

There was a very interesting article in the Economist about this. The gist of it is that 24% is indeed steep, but bear in mind that:

a) These are very small sums of money, so the proportional overhead is much higher b) Microfinance loans represent about 30% of loans, the rest coming from local loansharks, who typically charge around 2-300% apr (and have more violent debt collection procedures). Any cap on rates will lower that percentage, and so make things worse.

Interest rate limits for people (not corporations) are generally and histroically limited to about 8-12%.

[citation needed]

The evolution of the relationship between social and legal norms re: what are acceptable interest rates is a very interesting topic, with much cultural diversity and a broad range of case studies from canonical usury regulations in medieval Europe to the prohibition of pay day loans in much of the West in the 20th century, but blanket statements about 'loans being restricted from to 8-12%' lack any basis in reality and economic fundamentals. Just one counter example, I know of many people who took out mortgages (i.e., asset-backed securities!) right here in Belgium (a perfectly normal 'Western' country) less than 30 years ago with interest rates of 15 to 18%, and that was perfectly normal at the time, given inflation rates.

In the U.S. at least, there was a period of 150ish years where that was the case. Most states passed usury laws pretty soon after the U.S. was formed, and by the mid 1800s almost all had pretty strict interest-rate caps. They were loosened a bit towards the end of the 19th century, though some were strengthened again in the early 20th.

In 1978, the Supreme Court ruled that states couldn't enforce their usury laws against nationally chartered out-of-state banks--- the usury laws of the bank's state, not the customer's state, were the only ones that applied. That effectively killed usury laws, because it meant that banks just all incorporated in the states with the weakest usury laws. Then Congress completely preempted state usury laws for nationally-chartered banks in 1980.

But from sometime in the early/mid 1800s to 1978, most states had interest-rate caps in the 8-14% range, and most are still on the books, just ineffectual.

If you give out 50US loans are expexted to do due diligence and are onyl allowed to take 8% (4US) how should that work if you also have to cover for defaulting loans and pay fo the capital you are providing.

Luckily this is not really a problem since you return on investment should be closer to 1000% than to 100% (obviously your returns will diminish pretty fast as soon as your investment gets bigger). Therefore even interests rates of 50%+ shouldn't be a problem as long as it invested in income generating activities.

If you are interested in that topic I wrote my master thesis about it: http://www.scribd.com/doc/92714/Microfinance (partly a bit dated but the basic premise regarding interest rates should be still valid).

Interest rate is basically the price of money. In a developing economy like India, growing at 8-10% the demand for money is greater as a result, it's price is also greater.

If you make a term/fixed deposit in India for a year it attracts an interest rate of 8-9%. Education, Car and Home Loans for credit-worthy individuals from established banks range from 12-18%. Personal Loans, not backed by a security range from 20-24%. So a micro-finance institution lending at 24% p.a to 'non-professionals' in rural areas with no known credit history is not bad at all considering the risk that they take up and the cost of funds that they incur(as pointed out by someone else)

Keep in mind transaction costs which usually can't come down very much.

A $100 transaction cost on a $10000 loan is comparatively insignificant to us.

A $100 transaction cost on a $1000 loan is pretty crappy.

Of course any developing entrepreneurs will have higher interest rates - they are greater credit risks, and the costs of making the loan are similar for small loans an large loans. To properly compare, you have to compare the the 24% rate to the previous lenders, who, if I remember correctly charged rates from 100-300% and up.

That's all well and good provided that the loan is unsecured and generous (i.e. humane) bankruptcy laws are available.

In India, bankruptcy means a rural farmer will lose everything, including his land and his seed corn.

You can't have it both ways. Either the loan is secured and farmers pay low interest rates.

Or a high rate is allowed because the loans is an unsecured loan with high credit risk. But then the debter should be able to default without severe consequences, just a damage to his credit rating.

Neither is possible, because India doesn't know what humane capitalism is.

Edit: Sure 24% is better than 300%. So I should congratulate India for leaving the Feudal ages and entering the Robber-baron capitalist era of the 19th century.

Well OK: Congrats India! Now let's enter that 20th century, shall we?

You're posting many claims of this nature in this thread, but like my gran used to say 'when you're in a hole, stop digging'. Much of the West does not have what you call 'humane bankruptcy laws', most debts in most of Western Europe is non-dischargeable. The US is quite the outlier in this respect.

Furthermore, bankruptcy is not a counterbalance for high interest rates! It's a purely pragmatic tool, not a designed part of the system! It's very delicate to fiddle with what is fundamentally a relationship of trust between lenders and people taking loans through statute, and while improvements are possible everywhere, just saying 'India should have liberal bankruptcy laws' (i.e., discharging loans should be easy) is nonsense because the shocks this would cause in the financial system (at the micro level) would be severe and there's no telling if the long-term benefits (if any) will outweigh the sure short-term catastrophe.

I adore your use of a homey saying, it reminds me of Lord of the Rings.

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