That sounds like a decent utilitarian argument. Trouble is, from a more principle-based position, there is something unseemly about saddling the working poor with interest rates so high they would be considered usurious in the U.S. Indeed, several U.S. states have regulated payday lending rates to below half (24%-36%) of what is common in international microcredit (80%-100% or more). The Federal government makes it illegal to sell payday loans to military personnel at higher than 36% interest.
As with payday debtors, microloan-debtors pressured to repay profit-driven creditors can find themselves drowning in debt very fast. And that's exactly what is happening now in India. Here's an excerpt from this NYT report:
Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.One might go so far as to argue that for-profit microlending is immoral in any case, and should be banned the way commercializing organs already is in most countries. England goes so far as to ban the commercialization of blood. A good capitalist might again counter that as with microlending, such restrictions would diminish supply. Interestingly however, this doesn't seem to happen as there is rarely if ever any lasting shortage in British blood banks.
Even as the new legislation was being passed, 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 couple of weeks.
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.
Government officials in the state say they had little choice but to act, and point to women like Durgamma Dappu, a widowed laborer from this impoverished village who 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 anyway, 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 little choice but to forfeit her tiny plot of land, and her dreams.
“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.”
Ethicists including Peter Singer argue that's because when people are made to realize that the only way those who need the blood will get it is for others to give it freely, more people feel compelled to give and give more. We thereby preserve the possibility of altruism, the argument goes, strengthening human bonds by appealing to our better natures. If so, then perhaps this would also happen if governments banned for-profit microlending. But the genie is out of the bottle now so it may be too late to realistically consider it an option. Even so, the practice could be regulated with caps on interest as with recent increases in U.S. payday lending restrictions.