Dinesh Kamath's Editorial (Should banks lend money to the poor?) that was published in Newsband

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Should banks lend money to the poor?

It’s true 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.

These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power...that put their faith once more in the forgotten man at the bottom of the economic pyramid. Be sure that there is wealth at the bottom of the pyramid.

Banking is an instrument of social and economic change. 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 started seeing the poor as the future middle class.

There are some economists who are of the opinion that identifying borrowers and lending funds is a specialised activity best left to banks. External interventions can prove detrimental or even fatal to banks.

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. Public sector banks which were dictated by government policy over the last decade have suffered loss. 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.

The supporters of poor people complain that after asking thousands of questions and demanding hundreds of documents, finally these banks deny any loans to the poor. But when it comes to prominent persons like Vijay Mallya (Kingfisher Airlines) and Venkatram Reddy (Deccan Chronicle Group also owners of Deccan Chargers) they give loans in crores without asking any questions and without any guarantee. This is not right since the ultimate aim of banking system is to distribute money evenly across the society so all people becomes productive and get benefited.
Banks should be less dependent on the business fortunes of a few rich debtors. The number of poor farmers would be substantially more, but the aggregate amount of bad loans to be written off, if any, would be substantially lower than the doubtful dues from few rich debtors (e. g. KFA). The lower strata should also have the opportunity to climb up the pyramid.