Why do lenders rush where angels fear to tread

Only a forensic audit can answer the questions that lenders to Bhartiya Micro Credit have, but don't dare to ask

The Central Repository of Information on Large Credits (CRILC) is an electronic filing platform for exchanging business information. This platform, created by the Reserve Bank of India, draws credit information of banks with aggregate exposure of at least Rs 5 crore to borrowers.

The payment history of the Bhartiya Micro Credit (BMC), a Lucknow-based non-profit microfinance company, on CRILC, reads like a puzzle. In the past one-and-a-half years many banks that have lent to it have been reporting the BMC account moving to “default” and getting “out of default” categories. Take the case of Indian Bank: On January 1, 2018, its loan to BMC moved to the default category but on March 8, 2018, it was out of default, just to get into the default category again on March 31 and get out on April 17. The move-in move-out story continues, for almost all the banks that have lent to BMC. 

What’s happening? Is BMC taking fresh loans to pay off old loans? Is it arbitraging between working capital and term loans (lifting working capital loans to service term loans)? Vijay Pandey, 40, a serial entrepreneur and founder and managing director of BMC, says he has been servicing bank loans selling his family silver.

Lenders apprehend he can’t do this for long as his business has collapsed. Till July this year, only one bank’s exposure to BMC was overdue for over 90 days but less than 179 days; three exposures have become special mention account or SMA 2 where principal or interest payment is overdue for 61-90 days and another, SMA 1 (overdue for 31-60 days). As on September 30, 2018, BMC’s total exposure to at least 49 banks, non-banks and financial institutions was Rs 238 crore. 

Deciphering the credit bureau data is equally challenging. There are instances of loans overdue for 200 days and yet the account is treated as standard. BMC has taken small loans from a host of banks and it is more careful about servicing the bigger loans. Do the small loans prevent larger loans from turning bad? In the third week of August, it had 251 live accounts.

The company’s audited balance sheet for fiscal year 2018 shows its gross loan assets at Rs 269.34 crore, up from Rs 184.55 crore the previous year. Its 2019 annual report is not out.

Its website talks about being present in 10 states, covering 50 districts through 100 branches, overseen by 423 employees and serving 1,63,374 borrowers clubbed into 28,612 groups. But all these figures are shrinking drastically as the pile of bad assets is fast burying the company.

Many such microfinance entities have gone belly up and their lenders have lost money. Then why waste premium space in a national business daily on this? BMC is unique because of its branding which attracted lenders in hordes, falling over each other to give it money.

A commerce graduate, Pandey started his career as loan officer with Cashpor Micro Credit, another non-profit microlender, in 2005 at a monthly salary of Rs 3,800 and incentives. After 17 months, he joined Sonata Finance Pvt Ltd, a non-bank micro-lender at a higher salary (sans incentive) but left it to set up BMC in 2008 to fulfill his dream of offering livelihood to people at the bottom of the pyramid.

Missing in action: A photograph of e-rickshaw inauguration in Varanasi in 2015 from the BMC website. The website proudly displays pictures of the Prime Minister and a few other ministers at different BMC loan melas

He adopted the classic credit-plus approach — giving loans to the borrowers and teaching them how to use the money for productive purposes. He started financing rickshaw pullers for buying pedal rickshaws under a project in collaboration with the American India Foundation, a non-profit US organisation, and the Small Industries Development Bank of India. Punjab National Bank is one of the earliest lenders to this project.

So far it was an interesting story. It turned different when Pandey shifted focus from cycle rickshaw to battery rickshaw or e-rickshaw. Prime Minister Narendra Modi started appearing at different loan melas organised by Pandey in Lucknow, Varanasi, Noida and a few other places, distributing cycle rickshaws and later e-rickshaws. Such melas assembled those who the government has also been reaching out to for financial inclusion, mass insurance, health and cleanliness under the Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Mudra Yojana, Stand Up India, and other such programmes.

The loans given to the rickshaw pullers not only covered the cost of their vehicles but also their uniform, registration and training and so on. Fiercely wooed by the banks and non-banks, Pandey later started lending for buying solar charkha, starting at Khanwa village in Bihar, adopted by Giriraj Singh, the cabinet minister of the newly formed ministry of animal husbandry, dairying and fisheries. The company’s website bmcindia.co proudly displays pictures of the Prime Minister and a few other ministers at different BMC loan melas.

It was not only giving loans to the rickshaw pullers but also selling the rickshaws as Pandey found running an assembling unit for such rickshaws can bring down the cost for the borrowers. Wheel Enterprises, which holds 26.77 per cent stake in BMC, was formed for this. His lenders in private allege that BMC was making money both ways — by giving loans as well as selling rickshaws. 

While the lenders suspect fund diversion, Pandey says it’s a case of business failure. While demonetisation hit his business hard, other factors too contributed to the crash. Too many rickshaws clogged the roads and the pullers’ daily income halved, denting their ability to pay back. Besides, the battery of many rickshaws went kaput but the maker did not honour the warranty. Thousands of such rickshaws, returned by the borrowers, are now kept in junkyards.

Pandey plans to start afresh using parts of the junked rickshaws to create four different models — for ferrying passengers, carrying loads, running tea stalls and food carts. He has also picked up 1.54 per cent stake in Shikhar Microfinance Pvt Ltd, a company he wants to take over. This way, non-profit BMC will convert itself into a for-profit non-bank and eventually become a small finance bank. He also has another non-bank, Nimisha Finance India Pvt Ltd, under his belt (acquired in 2010) which will be used for giving loans to small enterprises. 

The turnaround blueprint is ready and Pandey promises to clear the dues of all. But the lending community is not convinced. Only a forensic audit can answer the questions the lenders have but don’t dare to ask.

The columnist, a consulting editor of Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. 

Twitter: @TamalBandyo