TIMES VIEW
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.
A policy of lending to lower-income groups also widens the economic base of banks, leaving them less dependent on the business fortunes of a few rich debtors. It's time banks discarded conventional wisdom and started seeing the poor as the future middle class. That leads to win-win all round, as the poor get an economic leg up through access to credit, while banks acquire more customers and shore up their bottomlines.
COUNTERVIEWCould be lose-lose, not win-win
Pyaralal Raghavan
Chidambaram's advice to banks to lend more to the poor is no surprise. Governments all over the world prefer that banks lend extensively to ensure easy credit to all sectors of the economy. But identifying borrowers and lending funds is a specialised activity best left to banks. External interventions can prove detrimental or even fatal to banks.
Their first responsibility is to ensure safety of the funds they solicit from their depositors which include employees, small business and pensioners. And that can be assured only if the money is loaned out to the most creditworthy borrowers. Unfortunately such a policy is often derided in the belief that banks favour the rich who can afford to provide collateral. In fact, the Indian experience shows that government's policies which direct bank lending to needier people for facilitating more inclusive growth have cost banks heavily. Trends in public sector banks over the last decade show that the share of non-performing assets arising from priority sector lending, which is dictated by government policy, has gone up from 46% to 58% while that from non-priority lending, which is guided by the banks' own choices, have come down from 52% to 42%.
This makes it clear that government policy to influence bank lending is one of the main reasons for loan defaults and the recurring loan waivers that burden taxpayers. Another example of the dangers of unbridled lending is the almost total collapse of the micro-finance institutions in Andhra Pradesh. Elsewhere in the world, extensive lending to subprime borrowers in the US led to a financial crisis which engulfed the whole economy and caused a global recession. The outcome of excessive credit to the poor can be lose-lose, not win-win.
