FDIC addressing problem of unbanked

In the U.S., the Federal Deposit Insurance Corporation (which guarantees bank deposits in the event a bank fails) is offering funds for a small loan program aimed at replacing payday loans, as reported by a Marketwatch article.

Banks participating in the program will offer short-term loans of up to $2,500 to low-income Americans, many of whom have a short or no credit history. Ironically, payday loans do not help consumers build a credit score, whereas banks participating in the FDIC program will report the activity to the credit bureaus. One participating bank reports success with the program:

Even with little information about a borrower's credit information, the lenders participating in the FDIC's program have experienced low default rates on small-dollar loans. In the second quarter of 2009, 5.2% of small-dollar loans provided by banks participating in the program defaulted, according to the FDIC. Roughly 9% of loans in the second quarter were in delinquency, or 30 days late, indicating that some borrowers had a difficult time paying the loan but most eventually paid it off.

Agency officials said they hope the success of the program will drive more banks to set up offices in low- and moderate-income districts, where foot-traffic will drive more customers. The FDIC said that many participating banks are working with non-profit institutions and community organizations to help identify potential borrowers who might benefit from small loans.

The FDIC program has been successful for Amarillo Bank. The bank offered 1,818 loans of under $1,000 -- with a total volume of $1.4 million -- to low- and moderate-income individuals from January 2008 through Sept. 30, Escajeda said. Over the same period, Amarillo made $6.8 million in loans ranging in size from $1,000 to $2,500 to 3,779 individuals.

The small loans have the same default rates as other categories of loans, and that small-dollar borrowers often become long-term customers, Escajeda said.

"We have found many success stories out of our small-dollar loans," Escajeda said. "They refer people to us, bring their relatives in, become long-term customers and buy other products...it's a mushroom effect."

That doesn't mean everyone else will be successful. Other banks will need to build trust among their target population. However, this is a step forward.