Rajan: Do not make fortune at cost of the poor
Microfinance institutions (MFI) shouldn’t aim for huge revenues but need to be content with “reasonable” profits while serving the poorest of the poor, feels Raghuram Rajan, governor, Reserve Bank of India (RBI).
In a recent address to microfinance lenders, he said that there should be a reasonable ceiling on interest rate on loans from microfinance lenders for consumer protection.
MFIs came under the scanner in Andhra Pradesh in 2010 following reports of suicides due to alleged coercive recovery methods used by the firms.
The government of the then undivided state went on to enact a law to regulate micro lenders. An RBI panel had also suggested a cap on interest rates charged by MFIs.
Rajan’s comments, however, are in complete contrast to what management guru CK Prahalad outlined his in book, “The Fortune at the Bottom of the Pyramid.” In the book, Prahlad presented the case that the world’s poor or those at the bottom of the pyramid are a huge mass market with vast buying power that firms can’t ignore.
“I think CK Prahalad did a dis-service by saying there is a fortune at the bottom of the pyramid. The moment one starts boasting about excess profits, it attracts the wrong kind of attention,” Rajan said.
Following Prahalad’s views, top companies around the world have rushed to tap the vast under-
IN GOOD CONSCIENCE YOU CAN’T MAKE A FORTUNE AT THE BOTTOM OF THE PYRAMID ... IF YOU START DOING THAT, IT STARTS RAISING ANXIETY ABOUT HOW THE FORTUNE IS BEING MADE
RAGHURAM RAJAN, governor, RBI
served hinterlands. For many consumer goods companies in India, rural sales now account for more than 30% of their total sales. Automobile companies, too, are heading to smaller towns and villages to tap new customers.
Philanthropists such as Microsoft-founder Bill Gates has described Prahalad’s book as a “blueprint on how to fight poverty with profitability”.
Rajan also batted for a strong consumer protection and grievance handling mechanism, particularly for the poor. “We need a redressal process, which is effective. We need to have systems, which the consumer can access at the doorstep, even in microfinance we must find ways that they can get redress,” he said.