Non-banking financial companies (NBFCs) and microfinance institutions, two sets of lenders that deal heavily in cash, are in a bind in the backdrop of demonetisation of high-value notes, as they are yet to receive any clarification from the central bank on how to proceed.
In infrastructure financing, only up to 80% of the value of the equipment is financed by the lender, while the rest is brought in by the borrower. Since scrapped currency notes form more than 80% of the value of notes in circulation, borrowers find it tough to finance the remaining balance with cash, as they used to.
“Smaller clients have to pay margin when they buy equipment, since we don’t do 100% financing. They have to pay advance to place new orders, to that extent, financing has even got reduced,” said Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance Ltd.
“Our vehicle finance business has been affected since cash is involved in it. Most of our disbursement happens at the month end; so, that has not been affected,” said a spokesperson from Cholamandalam Investment and Finance Co. Ltd.
Cholamandalam is allowing its customers to pay monthly interest payments through electronic payment systems such as real-time gross settlement system (RTGS) and the national electronic funds transfer (NEFT) route.
Since the company is not accepting old currency notes as repayment, it is allowing customers to also go and deposit the money directly in the company’s bank account after issuing an authorization letter, the spokesperson said.
A report by rating agency Icra Ltd, issued on 11 November, notes that lenders operating in segments involving sizeable cash collections largely witnessed in microfinance loans, gold loans, affordable housing loans, commercial vehicle loans and small-ticket retail loans could face challenges in the near term, as not all borrowers have a regular banking habit.
For most NBFCs, the level of cash in repayment or cashless repayment depends on the scale of the business and the type of customers.
The report notes that for commercial vehicle and passenger vehicle loans, “the extent of cash collections varies across lenders, and thus the impact would also not be the same for all lenders”.
The government on 8 November decided to scrap Rs500 and Rs1,000 notes after which 86.4% of value of currency in circulation became nil. People are finding it hard to do business or even buy goods because of the crunch in lower-denomination currency.
Last week, the Reserve Bank of India (RBI) asked microfinance self-regulatory bodies to provide both cash and non-cash transaction data for October to November, said P. Satish, executive director of Sa-dhan, which is one of the two microfinance self regulatory bodies in India.
Ratna Vishwanathan, chief executive of Microfinance Institutions Network (MFIN), the other self-regulatory body for the sector, did not respond to emailed queries.
The two self-regulatory bodies have sought the central bank’s clarification on whether they can accept Rs500 and Rs1,000 notes.
“On Monday, we wrote to central bank that the time period should be extended for collection of loan instalments. On Tuesday, the central bank asked us to furnish both cash and non-cash transaction data from October-November related to loaning operations of microfinance institutions,” said Satish.
Microfinance companies have deferred the repayments on an average by a week, which has slowed down the activity in this sector, though no additional fee is being charged to customers.
“Since larger part is cash transaction, the central bank wants to understand the gravity of the issue in order to give us relaxation. A minimum of Rs500 crore per week to a maximum of Rs3,000 crore per week has been deferred for both loan disbursement and loan recovery in the industry (due to demonetisation)” added Satish.
Through their field officers, microfinance institutions are helping borrowers on how to exchange old notes in order to stabilize the situation quickly. “As of now, cash is being rolled over for disbursements, but the prime focus is collection. We have a monthly loan instalment structure, which is a respite for the customers,” said Manoj Kumar Nambiar, managing director of Arohan Financial Services Ltd. Though payments are getting delayed, the institution will defer the reporting of the same to credit bureaus, but it is not clear how the delayed payment structure will be reflected in the books of credit bureaus.
“Complying with the CICRA Act (Credit Information Companies (Regulations) Act), we record and report information that is submitted to us by our member credit institutions. We cannot make any changes to this information and therefore, we will record and report the information submitted to us by the member institutions,” said Harshala Chandorkar, chief operating officer of TransUnion CIBIL. Credit bureaus are regulated by the CICRA Act in India.