Mumbai: Members of Mahesh Muthiah’s family have respectable and well-paying jobs. There are drivers, accountants, store-owners, and data-entry operators among them. Yet, no bank is willing to sanction them a home loan.
The reason is their address. The Muthiahs live in Dharavi, the Mumbai slum considered to be Asia’s largest.
It isn’t just the Muthiahs. Across the country, many people with jobs and salaries that should make them creditworthy are discovering that their ability and eligibility to borrow money from a bank or get it to issue them a credit card isn’t just a function of their salary, occupation, and credit history—their address may be the most important variable in this equation and could well decide whether the bank wants them as customers or not.
Gazala Aza was denied a credit card because she lives in a ‘negative zone’
The refusal of banks to lend money or issue credit cards to creditworthy people just because they live in the wrong neighbourhood comes at a time when India’s central bank, Reserve Bank of India (RBI), is pushing banks to reach out to the unbanked. Two out of every five Indians do not have access to banks.
Muthiah has known for some time that his family isn’t eligible for a loan. The store-owner used to work for a Mumbai-based private sector bank. His job was to use a database to make phone calls and offer loans to people. And he was instructed to withdraw the offer if the person lived in an area that was listed by the bank as “unsafe”.
It emerges that most Indian banks have such lists for the cities where they operate. Mint collected one such list for Mumbai from an executive of a foreign bank, and another from an executive working with the non-banking finance arm of another foreign bank. And a member of the Union government’s Sachar committee, set up to look into the economic status of minorities, claims that India’s largest private sector bank ICICI Bank Ltd has a list of its own too.
Finance minister P. Chida-mbaram announced in this year’s Budget that the Sachar panel’s recommendations, including one on banks increasing their lending to minorities, would be speedily implemented. In his Budget speech, Chidambaram said the government had opened 256 branches of public sector banks till December 2007 in districts where a substantial proportion of the population is from “minority” communities. He said 288 more branches would be opened by March 2008.
Banks are unwilling to approve loans to those living in certain localities, such as slums and low-income areas; Mumbai’s Dharavi is one such
Yet, residents of these areas say they still have to travel farther to access bank branches and find it hard to get loans or credit cards even if the branches exist. Clearly, the practice, called redlining in the US, is widely practised, yet undocumented in India.
Mint’s findings show banks here divide most big cities into three zones—white, grey and black. They sanction loans to people living in “white zones”. In “grey zones” they require additional documentation that prove a customer’s creditworthiness before sanctioning the loan. And in “black zones” they usually refuse loans.
Some banks use “negative” and “non-targeted” instead of black and grey. Others do “A” and “B”.
The Sachar panel’s report says banks and finance firms categorize and blacklist neighbourhoods in cities across the country. “The committee was given to understand that some banks use the practice of identifying ‘negative geographical zones’ on the basis of certain criteria where bank credit and other facilities are not easily provided,” the report adds.
Out of the mainstream
The black zones typically include slums, low-income areas, and neighbourhoods where Muslims account for a majority of the population. The banks do not advertise their lists, which are meant only for internal use, but most residents of these areas, and not just people such as Muthiah who have had a peek on the inside, are aware of terms such as “negative” and “black”. Many receive calls from the agents of banks offering loans and cards, but they know that these offers will eventually be withdrawn.
Mint has obtained from a loan consultant (an individual who helps people get loans) a list that this person said featured such “negative” areas in Mumbai, according to Prime Financial Services, a finance company owned by Standard Chartered Investments and Loans (India) Ltd, an arm of the British bank. The list includes slums such as Dharavi, Cheetah Camp, Govandi and Malad’s Squatter Colony. It also includes areas with chawls (irregular low-rise colonies) and other low-incomes housing such as Worli’s BDD chawl, Byculla’s Dagdi chawl and several fishing villages and fishermen’s colonies. Mint could not independently verify whether this list was put out by Prime Financial.
A spokesperson for Standard Chartered reviewed the documents with Mint and said “there seems to be no Prime Financial logo/mark on the papers sent by you.”
“We have robust credit assessment framework and policies. We lend on the basis of prospect’s credit worthiness. As a matter of prudent credit policy we do not lend to prospects who in our assessment will have difficulty in servicing their monthly loan installments on a regular basis. We also avoid lending to prospects who have poor credit history either with us or with any other financial institution or lender,” said Murali Natrajan, regional head, consumer banking, India and Nepal, Standard Chartered Bank.
Mint also obtained from an employee of Deutsche Bank, a similar list for Mumbai. The “negative” areas on this list include slums and other low-income neighbourhoods such as Ghatkopar’s Ramabai Colony, Jogeshwari’s Radhabai chawl, Mumbai’s red light areas of Falkland road and Kamathipura. The list has 90 blacklisted areas, called category A areas, and 68 grey areas, called category B areas. A bank spokesperson refused to comment on the issue. He also did not confirm or deny that the list shown to him was Deutsche Bank’s.
Deutsche Bank, which started retail operations in October 2005, and Prime Financial are among the smaller players offering consumer loans.
Most large banks are said to maintain such lists.
ICICI Bank had also submitted such lists as a part of its deposition to the Sachar committee. Lists provided gave details on negative areas in Mumbai, Ahmedabad and New Delhi. The committee’s report did not name ICICI Bank because other private and public sector banks admitted to the practice but did not submit lists, says M.A. Basith, a member of the Sachar committee.
A sample from one list provided by ICICI Bank and used in the committee’s report includes areas such as Dharavi, Kidwainagar and Sewree in Mumbai, and Gomtipur and Asarva in Ahmedabad.
“ICICI Bank sanctions loans to individuals depending on the income and payment capability. Even in some specific areas, the loan decision is taken based on the serviceability and collectivity of the loans,” said an ICICI Bank spokesperson in a written response.
The minority angle
In Mumbai, Deutsche Bank nad Prime Financial’s lists categorize several Muslim neighbourhoods such as Mohamed Ali Road, Bhendi Bazaar, Dongri and Behrampada as negative areas. These are some of the city’s oldest areas, but certainly not its poorest. People in these areas have been heard to say they cannot get a credit card from a bank because they live in Mumbai 3, 8, 9, a reference to the pincodes of the Muslim-dominated neighbourhoods of the city.
A few years ago, Gazala Aza, a social worker from Mumbai’s Bhendi Bazaar area claims she made three trips to Standard Chartered’s head office in the city to apply for a credit card. She says she was turned down by several relationship managers. Finally, Aza says, one bank employee told her that she should not bother coming again because she would never be issued a credit card as she lived in a “negative area”. Aza then asked her husband, who works in Dubai, to provide her with an add-on.
She says that she went to the bank a few months later, card in hand. The card has since expired and Aza hasn’t bothered renewing it but she has retained it as a souvenir of her experiences. Mint could not independently ascertain whe-ther Aza was refused a card.
The situation would appear to be no different in other cities. “Forget about banks, even the pizza delivery guys don’t deliver here,” says Abdool Qayoom, an Ahmedabad-based cleric.
“Banks said they demarcate those areas where the chance of defaults are high, there has been a history of non-recovery of loans, there is difficulty in finding addresses and a high incidence of anti-social elements as negative areas,” says Basith.
The history of zoning
The practice of redlining started in the US where banking regulations mandated the creation of maps indicating the level of security (or safety, from the banking perspective) for each residential area, across many cities. This often made minority areas ineligible for home loans and either denied formal credit or increased its cost in these neighbourhoods. In the 1960s and 1970s, several legislations were pas-sed in the US requiring banks to apply the same lending criterion in all communities.
While redlining often left out African American-dominated inner city neighbourhoods from the formal credit system, “redlining literature in the US shows that it was region-specific rather than colour-specific,” says Rakesh Basant, a member of the Sachar panel and a professor at the Indian Institute of Management, Ahmedabad.
Denying credit to people in certain areas results in them using “ informal credit systems that are much more expensive,” adds Basant. Or they simply give a different address, maybe a friend’s or relative’s— or the address of the office where they work.
In some cases, credit needs of individuals in “negative” areas are met by the local cooperative banks. For instance, Abhyudaya Bank, a cooperative bank, was the only one to have a branch in Dharavi for 21 years until Indian Bank op-ened a branch there a year ago. Bombay Mercantile and Kokan Mercantile are two other banks that have an extended reach and are popular in Mumbai’s Muslim-dominated areas.
Several banks now have branches in Dharavi. But residents in the area say that while they can open deposit accounts it is still difficult to get loans, particularly above Rs50,000, and credit cards. Manoj Mirje, who runs computer education classes in Dharavi, says he applied to ICICI Bank and Standard Chartered Bank for a loan but was turned down because he lived in a “negative area”. He then turned to Abhyudaya, where he has a savings account, and got a loan.
Zafar Sareshwala, chief executive and managing director of Parsoli Corp. Ltd, an Islamic stock brokerage, recalls how he was denied credit by ICICI Bank in 2002 after his business was ravaged in communal riots. “I was ready to provide my residence as collateral. But I was informally told I could on-ly get a loan of Rs5 lakh against a property valued at Rs1 crore.” Sareshwala then sold a stake in his firm for a Rs3 crore loan to the German Baader bank to revive his business.
Ironically, banks such as ICICI Bank and Citibank NA India run microfinance projects in blacklisted areas such as Dharavi. They disburse small loans in the range of Rs5,000-10,000. But these amounts are too small to start a business, build a home or pursue higher studies.
“Banks will have to address the (unbanked) segment through direct credit and not the microfinance window,” says Abusaleh Shariff, member secretary of the Sachar committee and chief economist at the National Council for Applied Economic Research.