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India's microfinance crisis not threat to banks

Regulators say the steep drop-off in microloan repayment in India does not threaten the health of the nation's banking system.

business Updated: Nov 19, 2010 16:59 IST

Regulators say the steep drop-off in microloan repayment in India does not threaten the health of the nation's banking system.

Loan collections in Andhra Pradesh state, which accounts for a third of microlending in India, essentially froze after the government cracked down on unscrupulous lending practices a month ago.

India's commercial banks are the primary lenders to microfinance institutions, prompting fears that defaults could destabilize the banking system.

India's central bank governor, D. Subbarao, says that won't happen. "There's no implication for the stability of the financial system," he says.

Analysts calculate the total exposure of Indian banks to microfinance institutions at less than one percent of their outstanding loans.