THE biggest names in Indian business — including Anil Ambani, the Aditya Birla group and the Bajaj group — entered the fray in 2013 when the Reserve Bank of India decided to grant licences to establish new banks for the first time in a decade.

But it was Bandhan — a Kolkata-based microlender serving poor rural women — that stunned India’s financial community by securing one of just two coveted general banking licenses, finally awarded a year ago.

Now Bandhan, India’s largest microfinance company, with a $1.6bn outstanding loan portfolio, is preparing to make the leap from provider of small, unsec­ured loans to poor rural borrowers to fully-fledged bank that can take deposits and offer other financial services, including bigger, longer-term secured loans.

Microlender Bandhan was the surprise recipient of an Indian banking licence coveted by powerful rivals

The transformation — which must be completed by September under the RBI’s terms — is the biggest test so far of Bandhan’s 54-year-old founder. Chandra Shekhar Ghosh, an earnest, Bangladesh-educated social entrepreneur, set up the organisation in 2001 in Kolkata, a pioneer in eastern India of the kind of microfinance he had seen flourish in Bangladesh.

“When RBI announced the banking licences, I gave leave to all my people. I gave them some money and I said, ‘Go, enjoy with your family — this is your lifetime achievement,’” says Mr Ghosh, during a visit to New Delhi, where he is meeting RBI officials. “[When] they came back, I sat with my senior people and said ‘now, these are the challenges’.”

Until now, Bandhan — which means bonds, or ties, in Bengali — has had a simple, highly-profitable business model. From about 2,000 bare-bones branch offices, field officers extend small loans, mostly ranging from Rs1,000 to Rs50,000, to poor women, who are allowed a year, or sometimes two, to repay.

Funds for these operations are provided in bulk by Indian commercial banks, which use microlenders such as Bandhan as a form of ‘last-mile link’ to serve poor borrowers. In this way they fulfil RBI regulatory requirements for socially oriented lending.

Becoming a bank will bring dramatic changes to Bandhan, its 16,000 employees and potentially its 6.3m borrowers. Once it receives its final clearances, the company plans to open the doors of 600 bank branches simultaneously, and start wooing deposits from well-to-do customers.

Over the subsequent 18 months, Bandhan will lose access to much of the bulk commercial bank credit it currently repackages into tiny microloans. It will instead have to rely on its own deposit base, or raise new equity, to extend credit. “Our existing loan book is $1.6bn and we have loans from different banks of around $1.2bn,” Mr Ghosh says. “These loans should be repaid, and our deposits must be increased. The first one or two years, we will take time to balance these two things. This is the first job for us.”

As a bank, Bandhan will be able to move into secured lending with larger loans and longer repayment periods, but that re­quires developing new capacities such as assessing credit risk. The RBI also mandated that Bandhan list on the Bombay Stock Exchange by 2018. Mr Ghosh says. “There are a lot of expectations of us.”

Born in humble circumstances as the son of a small sweetshop owner in India’s remote northeast, Mr Ghosh studied at Dhaka university, then worked for a big NGO in Bangladesh, cradle of the global microfinance movement. After moving to Kolkata in 1995, he saw the poor were at the mercy of rapacious moneylenders who char­ged up to 700pc interest.

In 2001, after failing to persuade any Kolkata-based NGO to take up microfinance, he tapped into his life-savings — about Rs200,000 — and set up his own non-governmental organisation to prove microfinance could work in India.

Mr Ghosh says the case for becoming a bank — which would allow Bandhan to take deposits — was overwhelming, especially after India’s dramatic 2010 microfinance crisis. Then, microlenders were accused of making excessive profits from usurious interest rates to borrowers. Government officials in Andhra Pradesh state abruptly barred collections on any outstanding microloans.

Bandhan had no operations in Andhra Pradesh, but the crisis highlighted the political risks of lending to the poor, as well as resentment generated by the high rates of interest for most microloans. Indian microlenders charge about 24pc interest — a mark-up on the average 12 to 14pc they pay for loans from commercial banks.

Attracting deposits would mean that Bandhan pays less for the funds it lends and Mr Ghosh says this could lower interest rates for small borrowers. That said, experts caution that deposit-based funding will itself entail substantially higher costs compared with the microlenders’ present lean operations.

“Am I working for development, or am I getting blamed by the community for being a profiteer?” Mr Ghosh asks. “If I can reduce the cost of funds, I can pass that on and reduce interest rates for the customers. That’s only possible if I can take deposits from the people. What is the way, other than to become a bank?”

To make the transition, Mr Ghosh has retained Deloitte as an adviser and hired 400 new employees with commercial and retail banking experience. About 3,000 veteran microfinance field officers will staff the new bank branches. All employees are undergoing intensive training. “I have told my existing employees, ‘the new people coming in — you will take them as your teachers to teach you about banking systems,’” he says.

Bandhan, which began as an NGO, became a non-banking finance company in 2009. The state-controlled Small Industries Development Bank of India took an equity stake, as did the International Finance Corporation, the World Bank’s private lending arm, in 2011.

In January, the IFC and GIC, Singapore’s sovereign wealth fund, invested $258m in total, raising Bandhan’s capital base to nearly $500m, well above the RBI requirement.

Mr Ghosh says:“My vision is to reach the people who are not reached by any other bank,” he says. “Traditional banks assess their banks by balance sheets. I assess my organisation by the number of customers. By 2020, I would like to serve 20m families.”

Bandhan will be the first Indian microlender to become a bank, but it is unlikely to be the last. Other big local microfinance companies, such as Janalakshmi, Equitas and Ujjivan, are also seeking bank licences.

Published in Dawn, Economic & Business, May 4th, 2015

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