The business of small deposit accounts

In a dispute reminiscent of the Compartamos controversy, the Sahara India Financial Corporation has been ordered by the Indian Central Bank to stop taking deposits. Sahara provides a range of financial services, most prominent among them deposit accounts for the poor. If savers get behind on their deposits, Sahara penalizes them by reducing the interest they receive. According to a report in the Wall Street Journal (subscription required), more than 70 percent of Sahara ’s customers are currently being penalized.

The Indian Central Bank has taken a dim view of Sahara's operations. In a filing with the Indian Supreme Court, it has aruged that "[s]mall depositors in the lower strata of society are being exploited." Subrata Roy (pictured), the founder of Sahara, had this to say in court documents:

Reducing the rate of interest payable to depositors who are not maintaining their schedule of payment of installments is a part of usual business practice across all financial institutions.

There are clearly some parallels to a dispute that erupted between Compartamos, a Mexican microcredit institution, and Muhammad Yunus. Compartamos sometimes charges an annual interest rate approaching 100 percent on its loans. Yunus claimed that the company is “raking in money off poor people desperate for cash.” While savers may not be as desperate as borrowers, the question still remains as to whether the Central Bank’s contention that Sahara is exploitative is correct. Many poor savers rely on their deposits to deal with emergencies, so the efficiency of microcredit and microsavings will have similar consequences.

For a little insight on this question, I turn to research carried out by CGAP. I think there are at least three relevant findings in work they have done on savings for the poor:

1. Small deposit accounts outnumber microloan accounts by a ratio of seven to one in transition and developing countries.
2. In some instances, poor people are so interested in saving that they will actually pay a charge to have roving deposit collectors hold onto their money.
3. Negative messaging, i.e. marketing the deposit account to stress that delinquent savers are penalized rather than that on-time savers are rewarded, was found to be effective in improving on-time saving.

I cite these particular findings because I think they point out that it is difficult to ascertain whether penalizing delinquent savers is really exploitative. Clearly, the issue is important for the poor—point one. However, it’s tough to know at what level of interest the market is efficient. These savers appear to be getting a reasonable deal compared to savers who have access only to roving deposit collectors—point two. The third point, however, is probably key. If Sahara had advertised the accounts such that good savers received an extra reward (in practice, the product would be the same, but the marketing of it would be different), would the Indian Central Bank be making these claims about exploitation? What do you think? The comments section, as always, is open!