P Chidambaram urges banks to lend more to the poor
Wednesday, October 24, 2012
Wealth at bottom of the pyramid
By saying banks need to lend more to the poor, Union finance minister P Chidambaram is on the right track. There is no denying that India continues to be a significantly under-banked country. Around 41% of the population is unbanked, with the figure touching as high as 61% in rural areas. During the acute depression of the 1930s in the US, President Franklin Roosevelt forcefully argued “these unhappy times call for the building of plans that rest upon the forgotten, the unorganised but the indispensable units of economic power…that put their faith once more in the forgotten man at the bottom of the economic pyramid”. Applying this principle, Roosevelt was instrumental in the US economic recovery that followed. Since then, the idea that there is wealth at the bottom of the pyramid has become an established economic principle.
Seeing the business potential of lending to the bottom half of the pyramid is critical to realising the potential of banking as an instrument of social and economic change. As demonstrated by Bangladesh’s Grameen Bank, properly managed collateral-free loans to the poor can see repayment rates as high as 98%. The argument that the poor are financially illiterate and therefore bad candidates for loans doesn’t cut ice. In fact, access to credit is a matter of survival for the poor, making their motivation to repay loans much higher than that of high networth individuals or companies.