Millennium Post

Don’t make fortune out of poor: Rajan to micro lenders

Asking micro-lenders to look at only a 'reasonable profit' to sustain their business while serving borrowers at the bottom of pyramid, RBI Governor Raghuram Rajan has said that one should not think of making a fortune while serving poorest of the poor.

The comments come in sharp contrast to management guru late CK Prahalad's views in his book The Fortune at the Bottom of the Pyramid.

The concept of the fortune at the bottom of the pyramid originally appeared in an article by Prahalad and Stuart L Hart in business journal Strategy+Business in 2004. That was followed by a book with the same title that discussed new business models targeted at providing goods and services to the poorest. Microsoft founder Bill Gates, a philanthropist who has so far spent millions annually to help the poor, has described the book as something that offers an intriguing blueprint for how to fight poverty with profitability. Rajan, himself is a renowned economist, said during a recent micro finance event, 'I think Prahalad did a disservice by saying that there is a fortune at the bottom of the pyramid.

'My sense is that you cannot, in good conscience, make a fortune at the bottom of the pyramid. Make reasonable profits, but if you start making a fortune, it does start raising societal anxiety about how the fortune is being made'.

Following the advice of Prahalad, many companies across the world and especially consumer goods, auto and telecom marketers in the country, have begun to tap the underserved markets and made a big market out of them, Rajan said. He added however that reasonable profit must be there at the bottom of the pyramid as the business has to be self-sustaining.

'If business is not self-sustaining, then entities will make a pretence of doing the business, but they are not really going to get engaged until there are profits,' Rajan noted.  The poor who want to borrow often face local monopolies, which in the long-run can be taken care of by market competition, but in short-run borrowers have to deal with it, Rajan said. 'When they face local monopolies, then essentially we don't have the presence of a competition commission right at the grassroots. And therefore, sometimes laws like you cannot charge more than a certain amount may be necessary to protect the poor,' he said.

Rajan said an interest rate cap on loans given by MFIs may force some people to go to money lenders who are outside the formal system and can charge an arm and a leg, but at the same time it ensures protection of consumers. He said: 'So, we should have a reasonable ceiling...not too low but not so high that it is irrelevant.

When we have more competition we can remove this ceiling. 'For now, despite the MFIs saying that the ceiling is harmful, and I admit it does harm certain individuals who are forced into the hands of the money lender, it is something that we should continuously re-examine but we probably have to live with it at this point.' The Reserve Bank had in April 2012 capped the interest rate on MFI loans at 26 per cent following the Malegam committee report.

RBI set up the Malegam committee after the October 2010 MFI crisis in Andhra, when the state banned MFIs from coercively collecting instalments after some borrowers allegedly committed suicides fearing recovery agents. This led to a massive default by borrowers in the undivided state from which the then largest MFI market is yet to recover.
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