Lender to Women Leads Push to Get Poor to Banks in India

Bandhan Financial Services Pvt., India’s first microlender to get a banking permit, said deposits will help lower funding costs as it expands into credit for companies to sustain profits as a bank.

Closely held Bandhan, India’s largest microlender by outstanding loans, could cut its lending rate at least three percentage points by using deposits instead of bank credit to fund loans, Chairman C.S. Ghosh said in an interview.

“When we’re a bank, we can give loans to small and medium-sized enterprises as well as mobilize deposits,” said Ghosh, 53, who’s still forging the new strategy for Kolkata-based Bandhan. “Even if costs of operations go up as a bank, the loan amount will go up, so automatically it will be balanced out.”

Bandhan lends as little as 1,000 rupees ($16.5) at interest rates ranging from 12 percent to 22.9 percent to women borrowers, aiming to help the rural poor avoid exploitation by money lenders in the shadow finance industry. Those risks even prompted a newspaper to reject a recruitment advertisement from Bandhan three months ago, on concern the company may not be a genuine microlender, Ghosh said.

“The biggest challenge Bandhan faces is a lack of awareness,” he said in the April 15 interview at his office. “That perception is changing after getting the banking license.”

Beating Billionaires

The lender this month beat applicants such as companies controlled by billionaires Anil Ambani and Kumar Mangalam Birla to the license from the Reserve Bank of India, as RBI Governor Raghuram Rajan prioritizes financial inclusion.

IDFC Ltd., India’s largest lender to road projects, also got a permit, the first such approvals in more than a decade. The S&P BSE Bankex index, a gauge of 12 Indian lenders, has gained 14 percent this year, compared with a 7.5 percent increase in the benchmark S&P BSE Sensex.

Bandhan’s net income rose 15 percent to 2 billion rupees in the year ended March 2013, Ghosh said. Its current cost of funds is 13 percent, compared with other banks’ base rate of about 10 percent, he said.

“The issue is, how I can reduce the lending rate for the poor?” Ghosh said. “Reaching them is expensive. Bandhan is paying a large amount to banks to borrow the money we lend to poor people. The cost of funds which gets reduced and that benefit I can pass on to my customers.”

The microlender’s loan book amounted to about 62 billion rupees across more than 5 million, mainly female, borrowers as of March, according to Ghosh. The average loan is 10,000 rupees, and 99.5 percent of credit is repaid, he said. Bandhan must become a bank by October 2015 under the RBI’s terms.

‘Financially Viable’

“About 80 percent of our customers don’t have a bank account and the remaining don’t bank regularly,” Ghosh said. “We’re in a good position for a banking license because we already have branches in rural areas. We have already proved that ours is a good, financially viable model. And for financial inclusion, we are in a good position.”

Bandhan was founded in 2001 to help alleviate poverty and empower women, according to the company’s website. Five years later, Bangladeshi microlender Grameen Bank and its founder Muhammad Yunus shared the Nobel Peace Price, boosting the industry’s profile.

World Bank estimates show that more than two-thirds of India’s 1.2 billion people live on less than $2 per day, and just 35 percent of adults have accounts at financial institutions, compared with 64 percent in China.

Group Model

A Bandhan borrower is typically inducted into a group of 10 to 20 female peers, two of whom must sign as guarantors in the loan application along with the client’s husband. The group approach is for “solidarity” and “peer pressure” to ensure repayments, the microlender said.

The group model sanctions loans of as much 50,000 rupees, Ghosh said. Another approach of extending credit of as much as 500,000 rupees to individuals began three years ago, he said. Ghosh said he’s assessing whether the group model will work when Bandhan is a bank.

“Bandhan’s existing branch network will help them to garner deposits,” said Arindam Saha, a Kolkata-based analyst at Credit Analysis & Research Ltd. “But the company will have to go through a structural transformation and set aside money for various statutory reserves. Scaling up infrastructure and revamping human resources will need investment.”

Credit Analysis & Research assesses Bandhan’s ability to repay debt at A+, an investment-grade rating. Saha said that will be reviewed once the microlender finalizes its business model as a bank.

Rural Costs

Bandhan was the largest micro-finance institution in the country in December by outstanding loans, followed by SKS Microfinance Ltd., data compiled by industry body Microfinance Institutions Network shows.

India has struggled to spur the expansion of banking services for the more than 800 million of its population living in the countryside.

Expenses deter commercial banks, with the cost of service delivery as high as 10 to 12 times the revenue potential of the marginal customer, the Boston Consulting Group estimates.

A microfinance company’s cost of operations, such as infrastructure and staff expenses, would surge upon becoming a bank, said Sanjay Arya, executive director at Kolkata-based United Bank of India, a lender to Bandhan.

Branch Network

Ghosh said Bandhan is considering a recruitment drive to attract people with banking expertise and has begun training existing staff to give them the new skills they require.

The RBI in 2013 issued rules that force banks to open one in four of their branches in communities with less than 10,000 people. India has just 11.4 commercial branches per 100,000 people, compared with 35.3 in the U.S. and 47.3 in Brazil, the International Monetary Fund’s Financial Access Survey shows.

“Banks don’t think poor people are credit-worthy,” said Ghosh. “We started as a micro-credit organization. We have a model which is financially viable. Our total operation will shift to banking. We would like to provide all financial services to all our existing customers, and to other customers who aren’t currently our borrowers.”

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