Cash transactions surge at Indian microfinance firms after note ban

Thursday, December 8, 2016

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 Rs 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 Rs 60 crore loans last month compared with Rs 250 crore in October.

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.

Source: LiveMint (link opens in a new window)

cash transfers, microfinance