Cashaa Sidles Past RBI To Enable Loans Against Cryptocurrencies
India’s stand on cryptocurrency remains to be clarified and banks have been cautioned against dealing with these tokens. But U.K.-based Cashaa, which calls itself a "next generation banking platform", has found a way around, in an attempt to a build a business of giving loans against cryptocurrencies.
The company has honed in on the country’s age-old credit co-operative societies, which do not come under Reserve Bank of India’s regulatory purview, to enable products such as loans against crypto tokens. In October, the company partnered with United Multi-State Credit Co-Operative Society Ltd. to offer "secured" loans against cryptocurrencies, Kumar Gaurav—founder, chief executive and the sole owner of Cashaa, told BloombergQuint over the phone.
“We saw co-operative societies is one such structure, in which if we apply some technology, we may not be able to replicate the functions of a bank, but we'll still be able to provide the basic retail banking services, which are required,” said Gaurav.
The services, to be launched under the brand name of Unicas—a joint-venture between Gaurav, the sole owner of Cashaa, and United—will hit the market starting Aug. 15, Gaurav said.
An emailed query sent to United about Unicas on Saturday didn't elicit a reply.
Unregulated Meets Unregulated
The tie-up between United and Cashaa brings together two mostly unregulated parts of the financial system.
Credit co-operative societies offer banking services such as deposits and loans to their members, but do not come under the purview of the RBI. They are governed by Registrar of Cooperative Societies of states or the Central Registrar. Cryptocurrencies, too, remain unregulated in the country.
Gaurav said bringing the two together can help provide banking-like services to the country's crypto enthusiasts. This is how he explains it will work.
The venture will be launched under the brand name Unicas. A customer who approaches Unicas will take membership of and open an account with United Multi-State Co-operative. This as co-operative societies can only offer services to their members. The membership, however, will be restricted to customers from Rajasthan, Delhi and Gujarat—states where United is licenced to operate.
The customers can then park their crypto tokens with Unicas and can avail a loan from United against those tokens. "Credit co-operative societies typically give unsecured loans. This will be a secured loan, secured against crypto," said Gaurav, arguing that this makes for better business for the society.
Loans against crypto, he said, could be granted for a term of one day to up to three years, at a daily interest levy varying between 0.04℅ and 0.06%, based on the loyalty tier of customers.
Crypto loans will be given at a loan-to-value ratio of 50% of the underlying crypto token price, while any shortfall in the LTV margin will be met by seeking additional collateral. In case of a price crash, the system will automatically liquidate the collateralised crypto tokens.
Down the line, the company also plans to issue debit cards that can be used at partner merchant outlets.
When asked whether Cashaa or Unicas will help convert rupee deposits held by customers in United accounts, Gaurav said that there would no direct conversion. “Unicas or United will not engage in conversion of cryptocurrency to Indian Rupee and vice versa, and it will be outsourced to partner crypto exchanges that will do the conversion in real-time for spending at merchant outlets," said Gaurav.
Even though Cashaa’s Unicas does not claim to be a bank, should the route taken by Gaurav to offer loans against cryptocurrencies raise alarm bells?
“Since United is a co-operative society and not a bank, the RBI doesn't have any regulatory or supervisory powers over the institution,” said NS Vishwanathan, former deputy governor at RBI.
“The cooperative societies which aren't licensed to do banking business provide loans and advances to their members out of deposits raised from their members," he said. "Here, the risk of failure, unlike banks, is shared by its members, who are not depositors in the way they are understood in the case of banks.”
Multi-state co-operative societies are guided by the Central Registrar of Cooperative Societies under the Multi-State Cooperative Societies Act.
Further, a co-operative society isn't allowed to issue cheques, provide inter-bank cash withdrawal facilities, issue debit and credit cards payable at any other bank, deal in foreign exchange, or take services of a clearing house, said R Gandhi, former deputy governor at RBI.
“It (United) is a credit society, it can lend money to its members for their own purposes, whether it is to buy a car, to start a business, or to buy crypto tokens," he said. "But Unicas branches should clearly mention it is a multi-state co-operative society, so that members can take its services, bearing that in mind.”
As per Section 56 of the Banking Regulation Act, no co-operative society other than a co-operative bank shall use as part of its name or in connection with its business any of the words “bank”, “banker” or “banking”.
A primary credit society is required to convert into a primary co-operative bank if its paid-up share capital and reserves cross the threshold of Rs 1 lakh, under Section 56 of the Banking Regulation Act, said Gandhi.
But the same rule doesn't apply to multi-state co-operative societies.
“The RBI recognises the loophole and has appealed to the government to harmonise these rules, so that multi-state co-operative societies are required to convert into banks beyond a certain threshold, in order to avoid a systemic risk,” he said.
Cashaa's Gaurav is undeterred by these questions and concerns and believes the model will grow.
"We want to grow it and make it bigger," he said. "Our services won't remain restricted to three states, but we are already evaluating and accessing other co-operatives outside these three states, and seeing if their current modus operandi and infrastructure is suitable to work with us."
Unicas, he claims, would expand from just two branches presently, to 1,000 branches across India over the next three years. "In a year, we will have deposits worth Rs 3,000-4,000 crore in United or in Unicas business," said Gaurav.
Given the nature of cryptocurrency itself is so volatile, said Hemindra Hazari, an independent banking analyst, the entity’s business is also, to that extent, unstable.
“Any entity that lends to individuals taking crypto as a collateral, inherently carries a high risk," Hazari cautioned. "On top of that, when one tries to institutionalise such money lending, it bears a potential risk to the entire system and, therefore, must be regulated."
On the liabilities side, the depositors in this entity must be made fully aware of the risks involved, as any failure on part of Unicas, will have to be borne by United's members. Unlike banks, the deposits of members of a co-operative society do not get covered under Deposit Insurance and Credit Guarantee Corporation Act, making it an even riskier proposition.Hemindra Hazari, Independent Banking Analyst