Felix Salmon surveys some of the recent trouble in India. The dilemma behind microcredit is simple. Let's say the interest rate is, annualized, fifty percent a year (not atypical) and that a family is borrowing on a regular basis. The debt payments can suck through their resources fairly rapidly, even if they are using the loans for valuable purposes, such as bringing the kid to the doctor. It all works fine if the family earns more than fifty percent liquid return, annually, on its marginal capital investment. How often is that the case?
Another scenario is that the borrowing allows the employment of another family member and thus it is self-financing for a good while but not forever. Eventually the "rate of change" effect overtakes the higher income level from the extra job.
How many decent-sized regions have rates of return above twenty percent? How many have micro-credit rates below twenty percent?
Nonetheless banning micro-credit is a mistake because the alternative is the moneylender, who charges an even higher rate of interest, and sometimes a kid who doesn't get to visit the doctor. The lesson is that escaping poverty is very difficult.