India MFIs baulks at chit fund depositors after Saradha

Last Updated: Sun, May 19, 2013 06:34 hrs
Saradha: Hearing on CBI probe deferred

In the aftermath of the Saradha crisis, microfinance institutions (MFIs) have stopped lending to high value depositors in multi-level marketing (MLM) companies, fearing default in payments.

MFIs have already stopped lending to the agents of MLM companies, while existing depositors are now required to declare their investments before taking loans from MFIs. Earlier, client verification in MFIs was mostly done on the basis of word-of-mouth from group members.

"We have been seeking data on investments from borrowers who have invested in multi-level-marketing companies. Those who have invested heavily on such companies are not being given loans," said Kuldip Maity, managing director and chief executive officer, Village Financial Services.

"If another major company like Rose Valley collapses, there might be payment problems for MFIs," said Samit Ghosh, chief executive officer and managing director of Ujiivan microfinace.

Notably, the extent of the Saradha crisis is to be ascertained, but much before regulators could sense the scam in its schemes, the MFIs had smelled the rat.

Around August 2012, when Saradha was a revered name in most households in rural West Bengal, Ujiivan microfinace had already issued a directive to his field managers to not to lend money to agents of multi-level marketing companies.

Ghosh, a seasoned banker, raised the alarm after field reports that multi-level-marketing companies had been briskly proliferating rural areas, promising investors to double money in just three years.

"We had an inkling that such companies can fail anytime. Thus, we decided not to lend to women whose husbands are agents of such companies," says Ghosh.

Not only Ujjivan, bigger companies like Bandhan too had been reluctant to lend to agents of such companies, though there was no formal intimation to the employees on the same.

"We were always selective in lending, and we have absolutely stopped lending to agents of private companies in the business of raising deposits," said Chandra Shekhar Ghosh, chairman and managing director, Bandhan.

Several MFIs have already starting internal surveys to assess the impact of the catastrophe on their business.

According to Maity, roughly about 5 per cent of 3,00,000 borrowers in Village Financial Services had taken loans from Saradha. Also, one of the main reasons cited by people for taking loans was the doorstep services, which included collecting deposits at home with minimal or no paper work, said Maity.

Saradha was just one of the many MLM companies operating in rural areas, and several borrowers of MFIs had deposited money in schemes of companies like Rose Valley and Alchemist.

Rose Valley have been meeting the early redemption needs only after deducting about 10-15 per cent from the principal.

In addition, in the aftermath of the Saradha crisis, the MFIs in West Bengal are facing an identity crisis, as over the last few years, several fake companies have been raising money under microfinance operation.

Recently, Bandhan microfinance identified two companies-Bandhan Agro and Bandhan Cooperative-who have been raising public deposits using the identity of Bandhan microfinance.

The two companies have been untraceable and their registered office does not exist, says Ghosh.

Earlier, the Reserve Bank of India had issued a public notice against Amazon Capital and Suraha Micro Finance of Sunmarg group for illegally raising deposits.

In recent times, West Bengal, Bihar, UP and Tamil Nadu have emerged as the fastest growing markets for the microfinance sector. West Bengal now has the largest branch network of MFIs, accounting for over 15 per cent of the all India branch network.

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