Risk Management, PRMIA

In early days of Microcredit and when the concept of Financial services to the poor was in its infancy, the segment of poor people was considered to be potentially high risk in terms of defaults.
The perception was strong enough to influence even the most local of the financial institutions to be not too enthusiastic on lending to this market segment. It was so bad that finally a form of credit was made mandatory under “ priority sector lending” schemes by many Central banks in most poor and developing countries to provide some basic level of liquidity for this segment.

Despite pockets of success for Microcredit initiatives in early 70’s& 80’s, the failure of too many aggressive Microcredit ventures in mid 80’s to early 90’s was again a proof to many naysayers about the repayment viability of this segment.

However ever since late 1990’s, the consistent success of microcredit business model around the world have slowly started to change this old paradigm.

Today there are numerous data points to support the contrarian hypothesis that the segment of poor actually can have an overall better credit rating & higher repayment rates as compared to people in the more richer countries.

It is estimated that an estimated 2.5 to 3 billion people live on less than 2-4 US dollars per day. Around 2.0 billion people have never used a bank. This has led to many governments actively pushing a financial inclusion agenda to have more equitable society in future.

With the Risks & defaults picture across the microcredit sector looking positive, the business viability of financial services to the poor is looking extremely attractive. Many global and local financial institutions are now reviewing their business models to be able to serve this underbanked segment across the world & recalibrating their traditional risks and defaults paradigms associated with the poor !

Once the new disruptive business model of Peer to Peer Lending networks becomes mainstream and start to look at this segment, there may be a potential trigger for another big paradigm shift on looking at risks,defaults,collateral from a portfolio to an individual peer to individual peer level. But then that’s a topic for another blog !