Lenders giving small loans hit hard by demonetization

Bandhan Bank stops disbursing new loans following withdrawal of Rs500 and Rs1000 notes and the resultant cash crunch in the country

Demonetization has led to a jump in deposits. Bandhan Bank received Rs1,500 crore in the past week. Photo: Indranil Bhoumik/Mint
Demonetization has led to a jump in deposits. Bandhan Bank received Rs1,500 crore in the past week. Photo: Indranil Bhoumik/Mint

Kolkata: Lenders that extend small loans largely to the unorganized sector have taken the heat of demonetization.

Bandhan Bank has stopped disbursing new loans in the wake of the ongoing cash crunch in the country, managing director and chief executive Chandra Shekhar Ghosh said Tuesday. The bank will not disburse any new loans till the weekend, he said.

The microfinance institution which became a bank last year still disburses Rs100-125 crore daily to the unorganized sector. Such loans still account for around 90% of its assets, Ghosh said.

Demonetization has led to a jump in deposits, with Bandhan Bank receiving Rs1,500 crore in the past week, Ghosh said. The bank had deposits of Rs18,000 crore at the end of September.

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Ghosh said unlike microfinance institutions, the bank’s loan repayments have not been affected as it is allowed to receive payments in old currency notes.

It’s a different story at microfinance institutions.

The Microfinance Institutions Network, or MFIN, a self-regulatory organization, has written to the Reserve Bank of India seeking permission to receive payments in demonetized currency notes.

At Village Financial Services Pvt. Ltd, a microfinancier in West Bengal, loan repayment has fallen to 60-70% of dues, managing director and chief executive officer Kuldip Maity said. At the same time, microfinance institutions cannot default on their loans to banks because that would impair their credit rating, he said.

Village Financial’s repayments were hurt since many of its borrowers do not have bank accounts, Maity said.

Arohan Financial Services Ltd said it too was facing repayment disruptions. The micro-lender, which makes loans worth around Rs150 crore every month, receives on average Rs4-5 crore in daily repayments.

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The impact is significant on both repayment and disbursal, said Arohan managing director Manoj Nambiar.

For now, these lenders have decided not to penalize borrowers who are behind on repayment. The focus is on regularizing things, Nambiar said.

Microfinance institutions will suffer some pain during the transition because they deal mostly in cash, said Abheek Barua, chief economist at HDFC Bank, adding that in the rural economy, currency notes of Rs500 and Rs1,000 have become the principal mode of payment. They will face problems both with assets and liabilities, and things may not improve for 2-3 months, Barua added.

Rating agency Crisil Ltd said in a recent report that companies offering micro loans would be impacted in the near term as repayments are made largely in cash. These firms will have to deal with new realities and reorient themselves, Crisil said, adding the long term effect of demonetization “may not be pronounced”.

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