P Chidambaram, Union Finance Minister, urges banks to lend more to the poor. 41 percent of India’s population is unbanked, in rural areas this number can even be as high as 61 percent, which clearly shows that India can be considered an “under-banked” country. Banks need to change their perception of the poor and support them in lifting themselves out of poverty.
Fortune at the Bottom of the Pyramid?
During the depression of the 1930s in the US, President Franklin Roosevelt argued that the focus should shift to those at the bottom of the pyramid and their buying power. Since then, the idea that there might actually be accessible wealth at the bottom of the pyramid has become a popular and well established economic principle.
Companies need to understand the enormous potential of lending to the underprivileged at the bottom of the pyramid. Refocusing on that customer group can make banking an instrument of economic and social change. A prime example is the well-established Grameen Bank in Bangladesh. Its business model proofs that collateral-free loans to the poor can see repayment rates as high as 98 percent. This clearly shows that traditional banks need to move away from their belief that the poor are financially illiterate and therefore bad candidates for loans. Rather, access to credit is a matter of survival for the poor, which makes their motivation to repay loans a lot higher than that of companies or high networth individuals.
Further, a policy of lending to low-income groups widens the economic base of banks and makes them less dependent on the business fortunes of only a few rich debtors. Banks need to see the poor as a rising middle class and understand their own role in supporting the poor to lift themselves out of poverty and get economically involved by having access to credit.