Credit history & Interest rates

I often get amused by the ways bank charges interest rate to different customers (In India, this practice is not present for the individual customer) depending upon the credit history. Credit history affecting the sanctioned loan amount seems OK but affecting the interest rate is strange. A customer with poor credit history will have to pay a higher interest rate than the one who is having a good credit report considering other parameters i.e. terms of payment remaining constant. This seems strange. Though I understand that this is because of the risk premium charged to the poor credit history customers but this makes them even more vulnerable to default. I also understand that the risk premium is calculated based on the person capacity to pay so that he does not default but why not charge him the normal interest rate so that he can pay even in easier terms. If at all the risk premium is the hedging strategy for the bad debt caused by some defaulting customers then the bad debt i.e. the defaults itself can be reduced if we keep the interest rate low.