Don't seek fortune at bottom of pyramid, RBI's Rajan tells micro-lenders

Reserve Bank of India governor Raghuram Rajan has asked microfinance firms to look for only a "reasonable profit" while serving borrowers at the bottom of the pyramid, saying one should not think of making a fortune while serving the poor.

The comments are in contrast to the views of the late management guru C K Prahalad, who in his book The Fortune at the Bottom of the Pyramid suggested there was money to be made even while serving the poor.

That was followed by a book with the same title that discussed new business models targeted at profitably providing goods and services to the poorest.

Microsoft founder Bill Gates, a philanthropist who spends millions annually to help the poor, has described the book as one that offers an intriguing blueprint for how to fight poverty with profitability, reports PTI.

Dr Rajan, himself a respected 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 Prahalad's advice, many companies across the world and especially consumer goods, auto and telecom marketers in India have begun to tap the under-served 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, 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.

"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 moneylender, 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.