Mumbai: Restrictions on cash withdrawals have had the perverse effect of boosting cash transactions in microfinance companies.
Microlenders are hoarding cash received in repayments and then disbursing it to customers directly rather than depositing it into bank accounts, officials of at least three firms said.
Typically, microlenders collect cash payments from their borrowers’ homes, then deposit it into their company account, after which they disburse loans. However, since the central bank curbed current account withdrawals to ₹ 50,000 a week, microlenders are shying away from bank branches.
“Disbursements in November had dropped to 25% (of what they used to be), since collections were deposited back into the bank account which created problem (since) we were unable to draw further cash," said S.V. Raja Vaidyanathan, chairman of Asirvad Micro Finance Pvt. Ltd. Asirvad disbursed only ₹ 60 crore loans last month compared with ₹ 250 crore in October.
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Another issue is the fact that borrowers cannot withdraw their loan amounts fully as the RBI limited withdrawals on accounts opened under the Prime Minister Jan Dhan Yojana (PMDY). To be sure, data regarding how many microfinance borrowers deal with bank accounts to receive loans is not immediately available.
“If borrowers have Jan Dhan account, they can’t take more than Rs.10,000 per month, so how do we really disburse. People are not able to withdraw in many places, which is the biggest issue," Vaidyanathan added saying that the company plans to roll over all the cash it has received in repayments.
Arohan Financial Services Ltd, a Kolkata-based microlender, saw its November disbursement halve from an average monthly disbursal of Rs150 crore. In November almost all loans were disbursed in cash compared to 80% cash and 20% non cash usually, said Manoj Kumar Nambiar, Arohan’s managing director.
As on 30 June, the average loan amount disbursed for a microfinance borrower was at ₹ 19,930, according to Microfinance Institutions Network data. This is significantly higher than the ₹ 10,000 loan amount that customers can withdraw from their Jan Dhan account.
Microfinance companies say they do not want to disburse loans directly into a customer’s bank account as they tend to charge interest from the first day of disbursal. If customers cannot avail the entire loan amount, then putting the money into their bank account would not be helpful.
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For Ujjivan Financial Services Ltd, cash disbursements in November was at 65% compared with 40-45% in the normal course of business, said Sudha Suresh, chief financial officer.
P. Satish, executive director of industry body Sa-Dhan, said companies have started reversing the loans credited to customer bank accounts, if they come and complain that they are not being able to access the loan amount.
This trend of cash disbursements is transitory, analysts say. “Since interest starts accruing once loan is disbursed, it is unfair to expect them to disburse money in bank accounts," said Jindal Haria, associate director of financial institutions at India Ratings and Research.
Collections for the microfinance institutions are coming back to the pre demonetization level except for states like Maharashtra, Uttar Pradesh, Madhya Pradesh and Kerala. As reported by Mint on 28 November, (bit.ly/2fxATFv) the RBI’s move to allow lenders more time to classify loans as bad has prompted politicians in some states to tell people that their loans have been waived.
“Things are improving in these states slowly since the sector is prone to external environment," Satish said.