Being ‘Sachet’ in Curbing Illegal Money Deposits

By Monami Dasgupta, IFMR Finance Foundation

Taking a significant step towards curbing illegal collection of deposits by unauthorized and illegal entities, RBI recently set up a website named ‘Sachet‘ (Alert). This initiative is in line with a recommendation made by the Committee for Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS, 2014)[1] on Citizen led-surveillance, namely that “RBI should create a system by which any customer can effortlessly check whether a financial firm is registered with or regulated by RBI.”

The website is a one-stop point for citizens to lodge and track a complaint against illegal acceptance of deposits/money by any scrupulous individual or entity. The website will enable citizens to lodge a complaint with a plethora of regulators. The information provided here is expected to be immediately shared with the concerned Regulator/Law Enforcement Authority who would initiate necessary action as per their procedures and processes. Citizens can also check whether an entity is registered with any regulator and whether they are permitted to accept deposits. The website also serves as an easy point of access to inform citizens about the regulations prescribed by all financial regulators and across central and state legislations. Having said this, it would have been greatly beneficial for the public to understand legislation if there were links that would direct to helpful content such as that on the NCFE website that provides impartial and easy to understand financial educational content (a similar example in another jurisdiction is that provided by ASIC’s MoneySmart website for Australia).

The Sachet website is also a platform for State Level Coordination committee[2] (SLCC) to disseminate information among members of SLCC, which in turn will help in curbing illegal and unauthorized money raising activities.

A snapshot of the regulators listed on the website (provided below) interestingly excludes certain categories of institutions in whose name fraudulent activities can be performed, such as banks, cooperative banks, and regional rural banks, as well as those types of entities that do not fall under the purview of any of the financial sector regulators, such as cooperative societies, trusts, NGOs and so on.


The Complaint Filing process is illustrated below:


If the SLCC does not forward the complaint to the respective authority within 30 days, the complainant can send a reminder to them.

It is important to note that this website is not intended as a solution to the last mile problem of difficulties in accessing external customer grievance redressal mechanisms. There is no link to the external grievance redressal mechanisms such as the Banking Ombudsman (for banks), Insurance Ombudsman (for insurance companies), SCORES for SEBI-regulated entities, or PFRDA (for pension products). Once a complaint enters the Sachet system, a seamless link to these websites would bring down customer distress considerably.

This is a significant first step in the right direction towards protecting customers from illegal and unauthorized individuals or entities that collect deposits, whether or not they are able and willing to repay these deposits. For a holistic last-mile solution, practitioners like various financial institutions as well as post-offices and district-level government offices can also get involved in the process of disseminating information about Sachet.

1 – CCFS Report – https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CFS070114RFL.pdf, Pg 187.
2 – State Level Coordination Committee (SLCC) is the joint forum formed in all States to facilitate information sharing among the Regulators viz. RBI,SEBI,IRDA,NHB, PFRDA, Registrar of Companies (RoCs) etc. and Enforcement Agencies of the States viz Home Department, Finance Department, Law Department, Economic Offences Wing (EOW)


The Nexus of Financial Inclusion and Stability: Implications for Holistic Financial Policy-Making


Guest Post by Dr. Martin Melecky, Lead Economist, South Asia Region, World Bank

Both financial inclusion and financial stability are high on international policy makers’ agenda. For instance, the G-20 has called for global commitments to both advancing financial inclusion (the Maya Declaration and the Global Partnership for Financial Inclusion) and enhancing financial stability (the Financial Stability Board, Basel III Implementation, and other regulatory reforms). One challenge is that there can be important policy trade-offs between the two objectives.

A rapid increase in financial inclusion in credit, for example, can impair financial stability, because not everyone is creditworthy or can handle credit responsibly—as illustrated in the last decade by the subprime mortgage crisis in the United States and the Andhra Pradesh microfinance crisis in India. In addition, trade-offs between inclusion and stability could arise as an unintended consequence of bad or badly implemented polices.

At the same time, there may be important synergies between inclusion and stability. For example, a broader use of financial services could help financial institutions diversify risks and aid stability. Similarly, financial stability can enhance trust in financial systems and the use of financial services. It follows that understanding the synergies and trade-offs is paramount for policy makers who strive to advance financial inclusion and stability in tandem.

When evaluating financial sector outcomes, and prioritizing the design and implementation of alternative financial policies, policymakers could miss important aspects by ignoring the interactions between financial stability and inclusion. To illustrate this point, it is useful to consider the following intuitive framework:


Deploying policies to achieve financial stability and policies to achieve financial inclusion may not deliver the intended results if there are major tradeoffs between the two outcomes. But if the deployed policies can generate synergies between inclusion and stability, mutual reinforcement of the two goals can occur. The last term in the equation above highlights the possible interdependence between inclusion and stability, which can thus either add or subtract from the independent goals of stability and inclusion. While most studies and policies have typically focused on either achieving the outcome of stable or inclusive financial systems independently, limited attention has been paid to the interdependence between the two outcomes.

In a recent paper, Cihak, Mare, and Melecky examine a wide array of measures of household and firm inclusion to estimate an overall tradeoff between financial inclusion and stability. They find that, particularly for individuals, the use of financial services is negatively correlated with higher bank capitalization. Moreover, there is a positive correlation (tradeoff) between many inclusion indicators and the costs of banking crises. Greater financial inclusion (increase in account ownership or debit card penetration) is associated with more costly financial crises (output and fiscal costs, as well as the peak NPL ratios during crises).

Interestingly, synergies between inclusion and stability are almost equally probable as tradeoffs—as indicated by the two-peak (bimodal) histogram or correlations in Figure 1. Dissecting financial stability into resilience measures, volatility measures, and crises measures reveals that financial inclusion can help mitigate volatility of growth in bank deposits and the volatility of bank deposit rates. While financial inclusion of individuals, such as account ownership, use of electronic payments, formal savings and credit, help reduce the volatility of bank deposit growth and bank deposit rates, savings by firms can help enhance financial stability across all three dimension: resilience, volatility, and low probability and cost of crises.

Figure 1: Although tradeoffs between financial inclusion and stability prevail on average, synergies between the two outcomes could arise with almost equal probability


The relationship between inclusion and stability is systematically influenced by country characteristics, such as financial openness, tax rates, education, informality, population density, and the depth of credit information systems. While financial openness and formalization of the economy increases tradeoffs between inclusion and stability, low tax rates, education, and credit information depth help generate synergies between the two goals (Figure 2).

Figure 2: The inclusion-stability nexus is systematically influenced by country characteristics


Greater financial openness and movement of capital is particularly challenging in middle and low income countries, which tend to have a limited capacity to manage capital flows and ensure prudent and efficient allocation of the funding to creditworthy firms and individuals.

Countries with higher informality, as measured by the number of years firms operated without formal registration, experience a lower tradeoff between financial inclusion and stability. A potential explanation is that previously informal firms that enter the formal sector tend to be greater risk-takers. Being higher risk-takers may have allowed these firms to earn higher returns to pay for more expensive informal credit. Because risk appetites are unlikely to change fast after becoming formal, rapid increases in credit to previously informal firms that enter the formal sector should be monitored for potential threats to financial stability.

Low tax rates may generate synergies by stimulating precautionary savings due to smaller social safety nets and greater probability of unexpected increases in taxes. Education can generate a positive relationship between inclusion and stability by improving financial literacy and responsible financial inclusion that helps the financial system reap the benefits of economic scale and risk diversification.

The depth of credit information systems generates synergies by improving screening of creditworthy customers, including new users of credit, and aids stability by, for example, improving the accuracy of estimations of expected losses. Finally, greater information depth also promotes competition in oligopolistic markets, decreases the cost of finance, and encourages more firms and people to start using a financial service or use more than one financial service. Particularly if financial policy focuses on advancing the financial inclusion of individuals, complementary policies to deepen credit information systems could help mitigate the estimated tradeoffs with financial stability.

These findings have important policy implications. Because tradeoffs and synergies between financial inclusion and financial stability are significant, they need to be addressed in policymaking. In many countries, multiple government agencies (in many countries the central bank and other financial supervisors) and ministries (in many countries the ministry of finance, economic development, or strategic planning) are responsible for policy on both financial inclusion and financial stability. Therefore, the tradeoffs and synergies must be addressed at a high enough policy-making level to ensure effective coordination. One important tool to formulate high-level policy for the financial sector are the financial sector strategies that could be exploited for that purpose (Maimbo and Melecky, 2015).


Aggregate Risk, Saving and Malnutrition in Agricultural Households

Guest post by Dr. Anjini Kochar, Stanford University, C. Nagabhushana and N. Raghunathan, Catalyst Management

Why is malnutrition in India’s central belt, which includes the state of Madhya Pradesh and Bihar, so high and so persistent despite relatively high rates of income growth? High rates of malnutrition reflect diets that predominantly feature cereals at the expense of more nutritional foods including pulses, vegetables and fruit. In turn, high cereal intensity is believed to be a consequence of agricultural land use patterns that favour wheat and rice. In recent research, we show that the link between cropping choices and nutrition exists only because of households’ savings choices. Faced with high and variable prices for pulses, households in this region primarily save in the form of stocks of wheat, using home stocks as an inflation hedge to substitute for the consumption of high-priced pulses. The attractiveness of wheat stocks as a buffer against high prices arises not just because stocks insulate households from inflation, but also because of the high costs of transacting with formal financial institutions in this region, despite the government’s recent attempts to ensure that all households have savings accounts in formal institutions.

Recent data from the National Family Heath Survey (2015-16) estimates that 44% of children under the age of 5 in the state of Madhya Pradesh are stunted, and 45% are underweight.[1] Though detailed data from this report are not yet available, earlier rounds (2005-06) confirm the limited role of income in explaining these rates: The percentage of malnourished children remains relatively stable over the wealth distribution, falling off only for the richest quintile of households. The percentage of stunted children in the lowest four quintiles of the wealth distribution was found to be 53%, 54%, 54% and 52%, respectively, falling to 42% for the richest quintile of households. Similarly, the percentage of under-weight children was 67%, 67%, 62% and 63% amongst the bottom four quintiles and 50% for children in the richest quintile.

Poor nutrition, undoubtedly, plays a major role in explaining the pervasiveness of stunting and low weight. Diets in this belt heavily favor cereals (wheat and rice) for all households, regardless of wealth or occupation. Expenditure on cereals amounts to 26% of total food expenditure in Madhya Pradesh and 28% of expenditure in the neighboring states of Uttar Pradesh, Bihar, Chattisgarh and Jharkhand. In Madhya Pradesh, as in neighboring states, this percentage shows almost no variation across households distinguished by principal occupation; it is as high (26%) amongst agricultural households who derive their income primarily from the cultivation of their own land as it is amongst households who are primarily dependent on causal wage work in unskilled labor markets (28%).[2]

While the dominant role of cereals in the diet of Indian households has often been noted, less attention has been paid to the striking importance of consumption out of home stocks for farming households. In Madhya Pradesh, a predominantly wheat growing state, data from the NSS (2011, round 68) reveal that consumption out of home stocks of wheat amounts to 42% of total wheat consumption of all households, but as much as 81% of the consumption of agricultural (farming) households. Similarly 62% of the wheat consumption and 67% of the rice consumption of agricultural households in neighboring states is also from home stocks.[3]

The hypothesis that poor nutrition reflects households’ decisions to hold large stocks of wheat as a precautionary response to price uncertainty may be surprising, only because prices of wheat and rice are far less volatile than that of other crops. This in turn is a consequence of government intervention in grain markets, both on the consumption side (through welfare programs such as India’s Public Distribution System that distribute food grains at highly subsidized prices) and on the production side (through minimum support prices). Relatively low and stable prices compared to other food crops reduces the likelihood that households will sell stocks of wheat to purchase more expensive food items, thereby lowering their value as an inflation hedge. Their value to households lies, instead, in their substitutability for other foods. Though such substitution would occur, even if households did not maintain grain stocks, these savings allow households to transfer consumption across seasons allowing more consumption in seasons characterized by poor rainfall and low incomes than would otherwise be possible. Substitution of wheat for other foods, such as pulses, does, however, come at a cost: It reduces the nutritional content of households’ diets. Additionally, the retention of wheat by farming households for consumption purposes reduces market supply and raises market prices. This adversely affects landless households. It also increases the cost of government purchases of wheat for the public distribution system.

We examined the relationship between nutritional status and savings using rich household data from a sample of approximately 2800 households from rural areas of Madhya Pradesh, collected in January 2016, matched to monthly data on market (mandi) prices for wheat and the main pulse consumed in this area, tur or pigeon pea, for the 2010-2015 period. Using this data, we tested three hypotheses. First, we assessed whether stocks of wheat are held as a precautionary response against variability in the price not just of wheat, but also tur. Second, we examined whether households’ stocks of wheat affect wheat consumption in the household in regressions that control for the effect of total savings. That is, we tested the hypothesis that the composition of a household’s portfolio of assets affects nutrition. In a final set of regressions, we considered the effect of the share of wheat in household diets on child health, as measured by their height and weight relative to WHO standards for children of the same age and gender.

Our findings support all three hypotheses. This has important implications. First, it links poor nutritional outcomes to the methods utilized by households to save against price and income uncertainty. Second, the insurance value of wheat stocks suggests that improved access to financial institutions will increase financial savings only if they offer a significant risk premium. This helps explain why the significant improvement in financial sector access in the country has not generated commensurate increases in financial savings. Finally, our research also helps reconcile two conflicting literatures. The first examines seasonality in consumption expenditures and generally finds that households are able to smooth consumption relative to income. In contrast, a second set of studies finds that children born in the monsoon months, and particularly those born in periods of low rainfall, have poorer health outcomes. We suggest that households are able to protect total food intake in the face of poor rainfall and other income shocks, but that this is achieved by increasing the share of stored grains of lower nutritional value. Thus, while they are able to maintain consumption levels and stave off hunger when incomes are low, nutrition suffers.

The findings of this paper suggest the importance of policies that help reduce price volatility, including the integration of agricultural markets. It also suggests that policies that increase the relative return to financial savings, such as flexible delivery options, lower transaction costs and financial literacy programs may also help improve nutrition. Finally, since the insurance value of wheat comes from its substitution for other crops, educating households on the value of a balanced diet may also affect household’s willingness to save in the form of stocks of wheat.

As part of our latest series of knowledge management sessions in our office, we had the pleasure of hosting Dr. Anjini who presented on this research. Here is the PPT from her session and below is the video of her talk.

[1] A child is considered stunted or underweight if his or her height for age or weight for age, respectively, is less than 2 standard deviations below that of children of the same gender and age in the reference population. The NFHS surveys calculate a household asset index that is the basis for comparisons across the wealth distribution.

[2] In neighboring states, this percentage varies from 27% amongst agricultural households to 30% amongst casual wage households.

[3] In contrast, in the southern states of Maharashtra, Tamil Nadu, Andhra Pradesh and Karnataka, characterized by lower levels of child malnutrition, while the share of expenditure on cereals (23%) is also high, only 6% of wheat consumption and 11% of rice consumption is from home stocks. Amongst agricultural households in these states, these percentages are 16% and 29%, respectively.


IFMR Capital: The Money Conductors

The latest edition of the Forbes India magazine features a cover story on IFMR Capital. The story traces the origins of IFMR Capital, its evolution over the years and how its work is translating into financial access for high-quality partner originators that it works with.


It is our mission to reach out to Indians who find it difficult to get a housing loan or a business loan because they are not part of the formal system. Banks and financial institutions that have the capital do not understand these segments. Our job is to bring in capital to originators who provide finance to informal sectors,” says Kshama Fernandes, managing director and CEO, IFMR Capital.

Over the last eight years, IFMR Capital has facilitated capital to the tune of around Rs 30,000 crore to 100-odd originators, serving 25 million end borrowers.

Read the article here.


The Power of Frustration

In a recent report by Wharton Social Impact Initiative & Knowledge@Wharton on Innovative Finance and the various forms it has taken, the report highlights among others, the multi-originator securitization (MOSEC) transaction that was first pioneered by IFMR Capital. Tracing the origins of MOSEC and how the idea, brought about by an underlying frustration at not being able to cater to small but high-quality originators, came into being. The article throws light on what has since been one of the key vehicles for IFMR Capital in its endeavour to enable capital access to partner originators that it works with.

From the article:

In June 2008, IFMR Capital, a non-bank financial company based in Chennai, India, had opened its doors with the express purpose of providing access to the financial markets to the millions of Indians who lacked it. But, the small- and medium-sized originators who were making loans to the population that IFMR Capital wanted to serve were constrained by the sizes of their businesses.

IFMR had been trying to persuade investors to buy some of the debt of these small microfinance institutions so they could make more loans. But investors were wary. They feared the risk from loans from a single small originator from just one area of the country that was possibly subject to the same natural disasters.

“They were very high quality originators, but they were very small. They were not ready to go to the capital markets,” says Mukherjee, who was CEO of IFMR Capital at the time and is now CEO of IFMR Holdings.

Finally, Mukherjee, deliberating with her colleagues, blurted out, “Why don’t we just pool?” What she was suggesting, securitizing the loans of small- and medium-sized microfinance institutions, originators with portfolios as small as $500,000, had never been tried.

In January 2010, a little more than a year after Mukherjee asked the question, IFMR issued its first multi-originator securitization (MOSEC, now trademarked), a $6.5 million issue bundling some 42,000 microloans, with an average size of $200, from four originators. To date, IFMR has issued 89 MOSECs for microloans worth more than $675 million, representing some 3.7 million loans securitized.

Using a similar model, it has done another $2 billion of MOSECs of affordable housing, small business and agricultural loans. The securitizations give the microfinance institutions access to low-cost capital at a price some 200 to 250 basis points lower than what they’d had previously, and to a new group of investors, including mutual funds, private banks and high-net-worth individuals.

Crucial to turning the idea into action was the special combination of people around the table at IFMR, says Mukherjee. Besides herself, with years of experience in structured finance at Morgan Stanley and Deutsche Bank, was Kshama Fernandes, then chief risk officer of IFMR Capital and now CEO of IFMR Capital, who had deep experience in Indian banking and was a well-known figure who provided credibility to their at-the-time unknown institution; Bindu Ananth, the president of IFMR Trust, whose idealism was essential to making the group press on and tackle problems rather than being discouraged by obstacles; and Gaurav Kumar, the head of origination, who intimately knew the individual lenders and the details of their business and could vouch for their creditworthiness.

“There was nothing in the law that actually prevented it. It was an innovation waiting to happen,” says Mukherjee. “At the end of the day, you apply the same tools and principles of diversification (you’ve done in the past). What we did was contribute to the learning in developing our own underwriting standards for microfinance and small business lenders. What we brought was discipline, expertise, and we became the expression for self-confidence for these asset classes.”

The securitizations have now become so commonplace that they are no longer considered innovative. However, IFMR remains alone in both structuring the deals and retaining a portion of the debt on its own books, says Mukherjee. That way, IFMR ensures that interests are aligned and that the deals are designed for long-term profitability and sustainability, she says.

Read the full report here.