RBI puts ban on Sahara India from accepting deposits

Sahara India Financial Corporation (SIFCL) having political connections and closeness with Bollywood stars has been banned by The Reserve Bank of India (RBI) from raising money through public deposits. RBI said ban is from immediate effect. RBI has put ban because the residuary non-banking finance company (NBFC) has "continuously violated" the requisite directions and guidelines.

In a statement released by the apex bank said the violations were related to maintenance of directed investments, payment of minimum interest rate, asset-liability management guidelines and know-your-customer (KYC) norms stipulated for opening of deposit accounts and the details on the agents of the company deployed for deposit mobilization.

The statement stated violation pertained to intimating depositors in time of maturity of their deposits and repayment of deposits on maturity. Ban will mean that company won’t be able to accept fresh deposits, nor renew deposits it has raised from 42.5 million depositors.

Residuary NBFCs used to accept public deposits in the form of daily deposits, recurring deposits and fixed deposits. The segment also included NBFCs which could not be classified as equipment leasing, hire purchase, loan, investment, nidhi or chit fund companies, but accessed public savings by operating recurring deposit-type schemes.

RBI in April 2007 had cancelled this discretionary investment headroom for Sahara. Therefore, Sahara was asked to invest entirely in government securities and other lower-yielding bonds, which reduced its margins. RNBFCs have to give minimum interest rates to depositors, which could be 3.5% for daily deposits and 5% for fixed deposits.
Sahara has made its presence in India and carries out its operations through a mass of agents.

According to the RBI statement, SIFCL shall immediately inform all its agents and employees that it has been prohibited from accepting deposits, and shall paste a copy of the order in a conspicuous place at each of its branches and offices.

RBI further in order to protect the interest of depositors and in public interest instructed Sahara to repay the deposits as and when they mature.

On the other hand SIFCL had issued a strongly-worded statement asking its depositors not to panic. It stated RBI order as “legally unsound” and is “wanting in prudence and application of mind”. In a statement company said it will be initiating legal proceedings very soon, adding it was “sanguine” about its chances of success. It also clarified that the depositors would be paid as and when the deposits mature, and other activities like insurance and mutual funds would not be affected by the order.