AVGO.ORG

Microfinance is going mainstream as international investors look to boost the value and the reach of small microlending institutions. As a result, the industry is likely to attract mainstream scrutiny from the press.

There is much to recommend the business and its capacity to make the difference between access to a better life and condemnation to a grim existence for tens of millions of people.

But, as any industry grows rapidly – and some see the signs of a bubble brewing in microfinance already – along with it comes increased reputational risk for lenders and their investors.

And as international capital pairs up with local lenders in India, it is crucial that both sides add managing the risk of negative perception to their to-do lists. If they are talking about valuations, debt instruments, new types of investors, non-performing assets and rates of return, this has to be part of the equation.

Positive press can have the opposite effect, of course, attracting investors and building momentum for the industry. But as it stands now, the risk for microfinance is greater of negative press as valuations in the industry soar yet the risk of bad news – such as a flood of loan defaults – grows.

The Wall Street Journal has taken a tough look at the industry in the past and will no doubt do so again. So will hundreds of others. Often they will focus on the negative if that’s where the news is, much to the consternation of the industry and its investors. Sometimes they will be justified in highlighting abuses or setting straight misperceptions in the industry. Sometimes, they will go too far or overlook interesting topics. But that’s not the point.

The point is that the financial hit that can result across the industry has to be something investors bear in mind. Critical stories can prompt regulators to overreact, politicians to seek examples to castigate, and other media to pile on. It’s not hard for a story about – and, yes, I am just making this up – “Bharat Bilked by Big Banks” to take on a life of its own.

“Negative press” is a small part of the overall microfinance picture compared with the “innovation that’s going on in the industry,” said Monica Brand, principal director of frontier investments at Accion International, organizer of the “Microfinance: Cracking the Capital Markets South Asia 2010″ conference in New Delhi this week. (She was speaking on a panel I moderated that included this topic; the WSJ is a media partner for the event.)

“The press has done a good job” at looking at how microfinance meets the needs of the people at the bottom of the pyramid, said Ashish Lakhanpal, founder and managing director of Kismet Capital LLC. But, he added, it tends to “sensationalize exploitation” with, for instance, sound bites about high interest rates. And, he added, a negative story about “one marginal player will adversely impact the whole industry.”

The industry already is taking some positive steps to minimize this risk. It is trying to self-regulate, which will help impose standards in operating and lending at least among the big players. Investors are aware of the issue and will seek satisfactory standards of corporate governance before they turn over their money to lenders. And credit bureaus will help minimize the risk of multiple lending to individuals with little prospect of repayment (”Poor Trapped in Vicious Debt Cycle.”)

But it is a topic that deserves high priority as microfinance gains an ever-higher profile.