Micro focus, macro aspiration

Why Bandhan Bank believes its microfinance focus will help it succeed as a universal bank

Rupali Das has been a borrower from Bandhan Bank for the past six years. She earns her living by selling teddy bears in and around Rajpur, a small town in Madhya Pradesh. Das was earlier selling plastic corks, but it was not a lucrative business. In 2012, she started selling teddy bears and now makes a profit of Rs.17,000-18,000 every month.  

Sumitra Mondal is another businesswoman who has benefitted from Bandhan’s micro loans. Another six-year-old borrower, Mondal’s first loan was for Rs.5,000. As per Bandhan’s policy, her credit profile has been upgraded after successful repayments of past loans and she currently has a loan of Rs.50,000.

Mondal sells saris and other dresses in and around her village. Her business model is simple: buying products from the city and selling them in the village. Mondal’s entrepreneurial journey started in 2010 when her husband, an auto-rickshaw driver was put out of business because of a high court ruling. In 2009, the Kolkata High Court ruled that only four-stroke LPG-run auto-rickshaws would be allowed to ply on Kolkata’s streets. For Mondal’s husband, the cost of converting his auto rickshaw into one operated by LPG was unviable. He stopped driving and encouraged Mondal to start a business.

There are many such stories of women joining Bandhan’s self-help group and embarking on an entrepreneurial journey that has changed their lives. These mutually beneficial relationships has formed the foundation for Bandhan’s phenomenal growth over the past couple of years.

A growing bond
Today, Bandhan Bank’s loan book stands at Rs.15,593 crore, with these micro loans making up 91%. The bank offers four products viz. Suchana loan (Rs.1,000–25,000), Srishti loan (Rs.25,000–1,00,000), Suraksha loan Rs.10,000) and Sushiksha loan (Rs.10,000). While Suchana and Srishti are given for businesses, the last two loans are provided to cover medical emergency expenses and to fund children’s education. Currently, Bandhan Bank, which has 23,200 employees, has 43% of its branches in rural areas and 24% in semi-urban areas (see: Hinterland calling). The remaining branches are in urban (20%) and metro cities (13%).

Before receiving the approval of Reserve Bank of India to set up a bank, Bandhan had put in place a highly profitable business as a micro-finance player. Being the largest micro-finance player with a wide margin, it accounted for 20% of the assets managed by micro-finance institutions (MFIs) as on FY15; and Janalakshmi, the second-largest MFI — accounted for 8% of assets (see: Leading from the front).

It is interesting to know the strategy behind Bandhan’s micro loan schemes. It gives out loans to individual women after segregating them into groups. Forming groups urges the borrowers to repay their loans regularly as it would lead to an embarrassing situation otherwise. If a borrower is unable to repay for a genuine reason, other members of the group step in to help. The group members also alert Bandhan if the new borrower has any dubious credentials.   

These groups are then assigned to doorstep banking officers (DBOs), who are connected to the doorstep centres (DSCs). Currently, Bandhan has 2,416 DSCs and 780 regular branches. The DSCs and branches are used as two different channels by Bandhan. Further, each cluster has about 40-50 such DSCs. Each cluster is managed by a cluster head assisted by his team members. Currently, Bandhan has about 99 lakh customers and about 277 ATMs serving its customers. 

This network functions with clock-work efficiency every day to make sure that there are no glitches in Badhan’s operations. Das and Mondal are both connected with the Laxmi group which is managed by DBO Sahina Khajun, who is connected to the Rajpur DSC.

Every week, members of Laxmi group assemble at a designated place to pay their weekly instalments in the presence of Khajun. The Rajpur DSC has 5 DBOs including Khajun and each DBO meets 22-25 groups. They meet each of these groups which has 35-40 members throughout the week at a designated time and place. These DBOs move from one self-help group to another, on a bicycle in a radius of 10-12 km. Bandhan currently has a network of 13,660 DBOs. The Rajpur DSC has over 4,000 borrowers with average loan per borrower of Rs.45,000. This DSC’s portfolio stands at Rs.15 crore with a recovery rate of close to 100%. 

While group members play an important role in verifying the credentials of new borrowers, Bandhan disburses only small loans to its first-time borrowers. It increases the creditline only after they have successfully repaid their previous loans. The credit appraisal process goes something like this: to begin with, the DBO (before Bandhan turned into a bank, DBOs were called credit officers) assesses the market by interacting with people around the DSC. If the DBO sees a reasonable demand for loans, he or she would talk with the people in the target area, and educate them about Bandhan’s financial products and how they can opt for them. The members are then selected and a group will be formed. Initially, Bandhan only lends to five borrowers and the initial loan amount is less than Rs.15,000. 

Now that Bandhan has received a banking licence, the daily collection and loan disbursements data are integrated into the bank. The DBOs have now started carrying a hand-held device (HHD) with them, which updates the repayments of MFI borrowers into the bank’s systems on a real-time basis.

All the DSCs have now been connected to the general banking branches. For instance, the Rajpur DSC has been connected to the Rajpur branch. Each bank’s branch handles collections from four-five DSCs. A bank branch is located at a two-kilometre distance from every DSC. 

According to R Baskar Babu, CEO of Suryoday Small Finance Bank, the reason behind Bandhan’s growth is that they treat micro loans as a business opportunity, while banks treat them like an obligation. He observes that Bandhan has created a successful model based on simple processes and even after turning into a bank, it has made sure that its processes do not get unnecessarily complicated.

Bandhan’s accessibility to its borrowers also gives it an edge. “Small borrowers don’t have to come all the way to the branch to get a loan. The loans are disbursed at their doorstep. Usually customers travel 10-15 km to the nearest branch and lose a day at work. Sometimes, they are unable to travel to the branch to make their repayments and they are branded as delinquents,” says Babu who is also the president of Microfinance Institutions Network. 

Since their man-power costs are low, the DSCs have a lower cost structure compared with other banks. Bank branches typically hire graduates or postgraduates and have a higher staff count. A typical employee at a DSC would have just passed higher secondary graduates and each DSC would not have more than five employees. “So, a DSC will end up breaking even in three to six months, while a bank would take two to three years to break even,” says Babu.

A senior banker with a leading PSU bank admits that the manpower costs at PSU banks are quite high. “Even regional rural banks today have salaries that are at par with regular bank branches in urban areas. This affects the viability of rural banking initiatives,” he says. “Today, Bandhan has managed to sustain its growth momentum owing to its low-cost structure,” he adds. 

So banks are now looking to experiment with low-cost structures like those adopted by Bandhan. GB Bhuyan, general manager, rural and agri banking and financial inclusion, Bank of Baroda, mentions that the bank is also working on having smaller branches in rural areas with one or two employees. The bank plans to open its branches on panchayat land where the rent costs could be as low as Rs.500 a month.

Cautious approach
While Bandhan inherited a quality asset book and a highly profitable business model, Chandra Shekhar Ghosh, the founder and CEO of Bandhan Bank, is cautious when it comes to rolling-out new banking products for the non-MFI segment. However, the unsecured portfolio of the MFI business doesn’t really worry him. “About 16 months back, our loan book was at 100% MFI, now it is at 91%. As we increase our non-micro finance loans, our micro-finance loans will come down proportionately. But this will take time. We have no plans to scale down the MFI business. Over the past 16 years, they (small borrowers) have shown us that they are better than the rich when it comes to repaying loans,” says Ghosh. The non-MFI loan book comprises MSME/SME loans, home loans, home loans against property and retail loans. Bandhan has also started offering gold loan. “We would like to continue with MFI credit and also increase the size of our MSME/SME book,” he adds. For now, Bandhan has decided not to focus on corporate lending, as there is little room to differentiate itself in that space. 

As of March 2016, Bandhan Bank’s SME and MSME loan book stood at Rs.65 crore with 5,929 borrowers. In the current year, the plan is to focus on loan size of less than Rs.10 lakh. SME loans are disbursed from six asset centres — Agartala, Baharampur, Guwahati, Kolkata, Patna and Siliguri, and the bank is looking to set up additional asset centres in areas where they see good business potential. 

Bandhan has built upon its existing lending relationships to build a robust deposit base with current and savings accounts making up 21.54% of the total deposits. As on March 2016, its deposit base, along with term deposits, stood at Rs.12,090 crore. “Certain MFI borrowers have also been opening RD and FD accounts with Bandhan Bank,” says Soumyajit Dutta, zonal in-charge, Bandhan Bank, who is responsible for operations of 12 clusters including the Rajpur cluster. 

Ghosh says his customers are using Bandhan as the primary bank. “They use our services for day-to-day transactions. Naturally, their account becomes a CASA account,” says Dutta. “We tell borrowers that if they are going away for a long holiday or cannot make it to the weekly meeting, they can keep their funds in the savings account and the repayment will happen automatically,” he adds. Every MFI borrower of the bank has been given a savings account along with a debit card of the bank. 

Rural focus
Regulatory push has been driving banks to expand their footprint in rural areas. RBI’s regulations require every bank to have 25% of its new branches in unbanked areas. Jan-Dhan Yojana, a policy measure to bring unbanked areas into the banking system, launched in 2014, has led to 28.17 crore accounts being opened as on March 29, 2017.

Anirudh Kamani, head — rural and inclusive banking, ICICI Bank, says, “Just getting the accounts opened is not enough. These accounts don’t have balances. People withdraw the direct benefit transfer as soon as it comes and then leave the accounts dry. This is neither good for banks nor the customers. We need to ensure that cash stays in the bank so that it can fetch some interest for the customers. It also gives banks access to low-cost deposits which they can plough back into lending.”   

Kamani mentions that the rural branches also need to lend more to sustain their efforts towards financial inclusion. Banks are recognising the advantage of MFIs’ low-cost business model and are now tying up with them. For instance, Kotak Mahindra Bank recently acquired BSS Microfinance in an all-cash deal of Rs.139 crore. Media reports suggest that IndusInd Bank could enter into an agreement with Bharat Financial Inclusion (known as SKS Microfinance earlier). “The primary challenge for banking in rural areas is running the operations profitably as the present business model, which is well adapted to the needs of metro and urban areas is not well suited for rural areas,” says Sanjay Silas, national head branch banking, Axis Bank. These banks’ recognition that rural banking cannot be sustained with traditional banking models validates Bandhan’s low-cost model. 

Ashwin K Mehta, chief general manager, rural and agri business, SBI, says, “We are also considering tie-ups with MFIs, but want to make sure that the MFI is diligently following the fair lending practices laid down by the RBI and good corporate governance.” It is a win-win situation for the bank, and the MFI as SBI can have access to customers at low costs and MFIs can access the bank’s diverse product mix and lower interest rates. “This can help us develop low-cost, high-touch model for our rural banking,” adds Mehta. 

To make sure that there is no repeat of an Andhra Pradesh-like crisis, which emerged in 2010 when growth-chasing MFIs ended up over leveraging their borrowers, the central bank in a 2011 notification, said that an MFI cannot lend to a borrower who is part of more than one self-help group. The micro-finance business needs people to remain closely in touch with local populace but also needs to ensure that they are empathetic to the borrower’s situation at times. Bandhan has managed to grow beyond its home ground, West Bengal, by doing exactly that. In fact, the faculty at the Bandhan School of Development Management at Rajpur teach new recruits that if a borrower is unable to repay the loan, it is their job to stay friendly with him, regularly meet him to ensure repayment, but never push him too hard to settle his dues. “Bad behaviour with the borrower can even cost them their jobs,” says Dutta.

Meanwhile, another PSU banker laments that business correspondents don’t do enough follow-up after an account turns NPA. Unlike PSU banks which give incentives to business correspondents for every loan applications they bring or for any money they recover from a dud account, Bandhan doesn’t give any incentives to its DBOs. The bank says that they have stayed away from such structures as it can create conflict of interest in the minds of the DBOs while engaging with existing or potential borrowers.

Banking with a difference 
The social impact that Bandhan’s operations has had on its borrowers and its continued focus on micro finance has helped it carve its own niche in the market. When Bandhan Financial Services started the micro-finance operations in 2003, it was competing with the usurious interest rates charged by moneylenders. As Gauri Mondal — a Bandhan borrower since 2005 recalls: “Moneylenders would charge at 5% interest rate every month.” This translates into 60% interest rate per annum. Bandhan is currently charging an interest rate at 18.5% per annum on loans compared with its previous rate of 22%, thanks to the increased access to low-cost funds owing to its growing CASA base and government securities which offer an 8% interest rate. Its cost of funds declined from 12% in FY15 to 8% in FY16.

As Bandhan looks to expand its branch network into urban areas, it could be difficult to replicate its low-cost structure. Some branches in the urban areas could even have a longer break-even of two years. However, Ghosh feels that third-party investment products and fee-based products such as wealth management could help the branches break-even soon. 

As part of its plan to have a pan-India presence, it is looking to expand in areas where it has little or no presence. For instance, Bandhan was not present in the south when it was solely an MFI. Today, it has 30 branches in the south, 40 in Uttar Pradesh, 80 in Bihar and 45 in Maharashtra. However, all this expansion does come at a cost for Bandhan. For instance, when it was an MFI, thanks to its low-cost structure and higher interest charged on loans, it had a net interest margin (NIM) of 10%. Ghosh now expects his NIMs to be in the range of 3% as a bank and is looking to improve on that by launching and cross-selling fee-based products. Similarly, its return on equity which was at 31.75% at the end of FY15, was down to 17% in FY16.

But that was a trade-off waiting to happen when Bandhan got the status of a bank. Despite the fall in net interest margins, Bandhan’s return on assets (ROA) stood at 3.5% at the end of FY16. This is incidentally even better than HDFC Bank’s ROA of 1.9% (the largest bank by market cap) for the same period (see: Bang for the buck). Equitas Small Finance Bank’s RoE which operates in the same space as Bandhan Bank was at 3% at the end of FY16. 

What’s also heartening to note is the steady increase in interest income and its ability to maintain a stable asset quality through the years. Since FY10, its interest income has grown at an average of 50% every year till FY16 (see: Cantering along). Net non-performing assets (NPAs) have stayed in the range of 0.01-0.5% during the same period. 

While Bandhan does come with a pristine track-record, banking is increasingly becoming a tough business these days. The industry is in a sea of trouble battling poor asset quality and higher provisioning that hurt their earnings. But if Bandhan sticks to its core competence of having a profitable low-cost model focused on micro finance, there is no reason as to why it can’t continue its dream run. “We have built our model in such a way that our bond with our MFI customers continues,” says Ghosh. Bank of Baroda’s Bhuyan thinks Bandhan’s ability to provide doorstep banking in rural areas will be a key differentiator and help sustain its growth even if they charge higher rates compared with banks. 

Bandhan means a bond. After building solid relationships with its micro-finance borrowers, the bank is looking to forge another bond between the micro-finance borrowers and the urban savers. While it is too early to call, Bandhan’s ability to build strong customer relationships will make it a differentiated player in the banking sector.