A SUCCESSFUL MICROFINANCE TO BANK:“A CASE SUCCESSFUL MICROFINANCE TO BANK:“A ... individual lending through group formation. ... IDFC Ltd. In terms of client

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<ul><li><p>513 | P a g e </p><p>A SUCCESSFUL MICROFINANCE TO BANK:A </p><p>CASE STUDY OF BANDHAN </p><p>Ms. Sheetal Thomas1, Dr. Govind B Dave</p><p>2 </p><p>1Assistant Professor, </p><p>2Dean Indukaka Ipcowala Institute of Management, CHARUSAT (India) </p><p>ABSTRACT </p><p>There are not many reports about the role of commercial banks in microfinance. This can be due to a large </p><p>level of absence in the field. Microfinance in general does not attract commercial banks. Due to this absence of </p><p>mainstream commercial banks the microlending activity was taking over by large number of nongovernmental </p><p>organizations popularly known as NGOs.This paper aims to study Bandhan as a case study from its </p><p>inception as an NGO to its performance as a bank. The first half of the paper is dedicated towards highlighting </p><p>its financial structure as an NGO and an NBFC. The paper further analysis its financing structure in last 5 </p><p>years. Finally the paper concludes with an analysis of the probable challenges to be faced by Bandhan in its </p><p>operations as a bank. And Bandhans role in financial inclusion. </p><p>Keywords: Bandhan, Banking, Financial Inclusion, Microfinance. </p><p>I. INTRODUCTION </p><p>Bandhan was christened in 2001 under the able leadership of Mr. Chandra Shekhar Ghosh, a Senior Ashoka </p><p>Fellow. The meaning of bandhan is togetherness and its mission and vision reflects its name. The main thrust of </p><p>Bandhan is social upliftment and economic emancipation of women who are socially disadvantaged and </p><p>economically exploited. To achieve their objective, Bandhan engages in the delivery of microfinance services to </p><p>the poor women residing in rural and urban areas across the country. </p><p>Bandhan has been engaged in the delivery of microfinance service for the last 13 years. The model followed is </p><p>individual lending through group formation. Bandhans commitment towards triple bottom-line values is </p><p>strongly asserted by its intervention in development activities. </p><p>The financing structure of Bandhan during its operations as an NGO as per www.mixmarket.org is as follows: </p></li><li><p>514 | P a g e </p><p>TABLE1: Financing Structure of Bandhan as an NGO from 2003 to 2006 </p><p>Figure: 1-Capital Asset Ratio Figure: 2- Deposits to Total Assets </p><p>Figure 3:- Debt to Equity Ratio Figure 4:- Gross Loan Portfolio to Total Assets </p><p>From the above figures it can be found that Bandhan had a stable financial structure, it canbe noticed that the </p><p>capital asset ratio and gross loan portfolio to total assets have constantly increasing showing better capital </p><p>planning and loan disbursements. </p></li><li><p>515 | P a g e </p><p>As of February 2015, it operates approximately 2,022 branches in 22 states and union territories in India. </p><p>Covering 246 districts, with 175 under banked districts. Bandhan has 15,956 staff that cater to 1,34,37,340 </p><p>clients. Out of which 63,66,296 are active borrowers-all women. The cumulative loan disbursement amounts to </p><p>` 4,43,778 million out of which outstanding loans amount to to ` 89,079 million. Bandhan offers loans for </p><p>microenterprises and health emergencies and is led by Chairman and Managing Director Chandra Shekhar </p><p>Ghosh. Bandhan's past investors include Punjab National Bank (PNB) and Small Industries Development Bank </p><p>of India (SIDBI) </p><p>As of March 2014, it reported return on assets (ROA) of 5.01 percent and return on equity (ROE) of 28.24 </p><p>percent. </p><p>Some of the loan products offered by Bandhan are as follows </p><p>TABLE 2: Loan Products Offered by Bandhan Financial Services Pvt. Ltd </p><p>Product Name Loan Size Range </p><p>(`) </p><p>Loan Term </p><p>(Months) % Female % Urban Loan Purpose </p><p>Suraksha Loan </p><p>(Health Loan) 1,000 - 10,000 12 100% 20% - 40% </p><p>Other, It can be used only for </p><p>emergency health needs. , Can </p><p>NOT be used for business </p><p>Suchana Loan 1,000 - 15,000 12 100% 20% - 40% Business </p><p>Srishti Loan 16,000 - 50,000 24 100% 20% - 40% Business </p><p>Susikhsha Loan 1,000 - 10,000 12 100% 20% - 40% Education </p><p>Fisheries Loan 10,000 - 50,000 12 - 24 80% - 100% 20% - 40% Business </p><p>II. BANDHAN FROM NGO TO A BANK </p><p>Bandhan started as an NGO and in 2006 got its status as an NBFC. It further grew into becoming one of the first </p><p>MFIs to have granted a banking licence. But why does it need a banking licence, while it does the basic activity </p><p>of banking i.e. lending. </p><p>Even though NBFCs perform functions similar to that of banks, there are a few differences. One of them is that </p><p>an NBFC cannot accept demand deposits, it is not a part of the payment and settlement system and as such, an </p><p>NBFC cannot issue cheques drawn on itself; and deposit insurance facility of the Deposit Insurance and Credit </p><p>Guarantee Corporation is not available for NBFC depositors, unlike banks. </p><p>Over the past couple of years, the Indian banking sector has displayed a high level of resilience in the face of </p><p>high domestic inflation, rupee depreciation and fiscal uncertainty in the US and Europe. This has necessitated </p><p>the banks in India to concentrate much more on operating efficiency, outsourcing and cost optimization now </p><p>than ever before. With deregulation of savings bank rate and bleak global economy, the banks are focusing on </p><p>alternative sources of revenue, like fee income, trade and vendor financing, geographic expansion et al to </p><p>maximize their revenues. The Banking sector in India has adopted and embraced technology to keep pace with </p><p>the international development in the banking industry and offer quality products to its clients. Technology has </p></li><li><p>516 | P a g e </p><p>enabled banks to conceive and deliver products that are more in line with the requirements of its clients on the </p><p>one hand and also more cost efficient on the other. </p><p>Reserve Bank of India (RBI)intended to widen the reach of the `84 trillion banking industry to unserved </p><p>&amp;understand segments. According (2012 World bank) document only 35% of Indian adults have access to </p><p>formal banking services. </p><p>Granting banking licence to Bandhan, a leading microfinance institution (MFI), is the first step towards this. As </p><p>it gears up to start operations, Bandhans founder Chandra Shekhar Ghosh aims at extending services beyond </p><p>credit to economically weaker sections who have been deprived of these services so far. Nonperforming assets </p><p>and defaulters are not an issue for his new bank, he says, but recruiting people for rural services will be a </p><p>challenge. Bandhan borrows fund at 12 to 13% &amp; to disburse them among the borrowers. Bandhan has different </p><p>levels of challenges &amp; must quickly put it all together within 18 months will have to set itself up as a full fledge </p><p>bank where its role will no longer be restricted to meet lending but will also get into the other aspects like, </p><p>collecting deposits among other like any other bank. </p><p>Mr. Ghosh also quotes about their strategy to start a bank he said Even as it is set to transform itself from a </p><p>microfinance institution to a bank, Bandhan promises to maintain the poor as their target for loans &amp; advances. </p><p>Our existing captive customers are poor economically backward people with less than `50,000 income per year, </p><p>we all now trying to target those with income above `50,000 per year. He said that the physical touch is more </p><p>important to reduce NPAs (Nom Performing Assets) </p><p>With microfinance continuing to be Bandhan's spine, the next big question that needs to be resolved is of the </p><p>choice of its banking model. Bandhan is among the first generation MFIs and follows the Grameen model of </p><p>banking. Under this model, credit decisions are taken at the branch level, which facilitates quick disbursal of </p><p>loan in about a day's time. New generation MFIs like Ujjivan and Janalakshmi, on the other hand, follow the </p><p>retail banking model, where credit is disbursed after credit appraisal at a centralised unit. In these MFIs, the </p><p>credit disbursal usually takes about five days. </p><p>Bandhan is startlingly different from the other institution that has also been granted a banking licence IDFC </p><p>Ltd. In terms of client profile, management bandwidth and asset size, the two are a study in contrast. There </p><p>would be number of challenges that they have to face before they make it to be good banks in the country. </p><p>III. FINANCING STRUCTURE OF BANDHAN </p><p>TABLE 3: Indicative Ratios of Bandhan Financial Services Pvt. Ltd </p></li><li><p>517 | P a g e </p><p>In April 2014, Bandhan had an outstanding loans of `5,704 crore; its net worth was ` 1,100 crore (` 96 crore in </p><p>equity with a capital adequacy ratio of 21 per cent). Its capitalisation is expected to be sufficient to support its </p><p>growth in coming years. The capital adequacy ratio is increasing and it is a positive indicator. It also shows that </p><p>the net worth of Bandhan is increasing thus would help them to attract more investments. </p><p>3.1 Capital / Asset Ratio </p><p>Figure 5:Capital/Asset Ratio of Bandhan Financial Services Pvt. Ltd </p><p>The above figure shows the Capital/ Asset ratio of Bandhan MFI of last 5 year. It can be found that there is a </p><p>gradual increase in the capital asset ratio for years. Most of the MFIs have a CAR (using Tier 1 only) well </p><p>above the 8% minimum. This is appropriate, as analysts suggest that minimum capital adequacy for MFIs </p><p>should exceed the Basel II recommendations by at least 50%, i.e. that MFIs should maintain CAR of 12% or </p><p>higher. MFIs should have a larger capital buffer for several reasons: first, delinquency rates for MFIs can be </p><p>volatile; second, MFI operating expenses are generally higher than for commercial banks; and third, access to </p><p>funds for emergency recapitalization is more limited. </p><p>3.2 Debt to Equity Ratio </p><p>Figure 6:Debt to Equity Ratio of Bandhan Financial Services Pvt. Ltd </p></li><li><p>518 | P a g e </p><p>The above figure indicates the debt equity ratio for last five years. It is important for all organisations to </p><p>maintain a proper balance between debt and equity.If an MFI has a large amount of equity and very little debt, it </p><p>is likely to limit its income generating potential by not making use of external sources of debt (that is, a line of </p><p>creditor a loan that can be borrowed for, say, 10% and lent to clients at 24%). Therefore, it maybe better for the </p><p>MFI to increase its liabilities, if possible, to increase its income-generating assets (its loan portfolio). However </p><p>if DER increases rapidly, it can be said that the MFI is approaching its borrowing limits and this can have an </p><p>hindrance to growth. In case of Bandhan the MFI has decreasing DER which improves its borrowing capacity </p><p>for future expansions planned. </p><p>3.3 Gross Loan Portfolio to Total Assets </p><p>The Gross Loan Portfolio to Total Assets ratio indicates the proportion of the core earning assets of the MFI. </p><p>Figure 7: Gross Loan Portfolio to Total Assets Ratio of Bandhan Financial Services Pvt. Ltd </p><p>Credit is the flagship service offered by MFIs to clients outside the net of formal financial services. For MFIs, </p><p>loan portfolio is the primary revenue generating asset. It also gives details about the health of MFIs. The above </p><p>figure shows that Bandhan has increased its gross loan portfolio to total assets y-o-y and stands at 91.07% in </p><p>fiscal year 2013, and is also the first among top 10 MFIs in with ` 6107 crore in loan portfolio. It also is an </p><p>indicator to the performance of the institution and its contributionto the goal of financial inclusion. </p><p>3.4. Return on Asset (ROA) and Return on Equity (ROE) </p></li><li><p>519 | P a g e </p><p>Figure 8: Gross Loan Portfolio to Total Assets Ratio of Bandhan Financial Services Pvt. Ltd </p><p>Return on Asset (ROA) and Return on Equity (ROE) are the two profitability measures that the MFIs and their </p><p>investors generally consider for judging the viability of their MFIs. The sector-average ROA and ROE are </p><p>generally viable and healthy at a median range of 1.94% and 9.25% respectively.The above Figure represents </p><p>the ROA and ROE of Bandhan for last 5 years. In year 2009-10 the ROA is 3.56%. In year 2010-11 it was </p><p>increase 5.38% so it indicates that Bandhan generating earnings based on their assets. In year 2013-14 the ROA </p><p>is 5.14%. The ROE was lowest for the year 2012 at 26.85% but revived by increasing by 2.05% in 2013 at </p><p>28.90%. It can also be noted that the lag period was due to the crisis microfinance faced in recent past. It </p><p>indicates that investors can have positive expectations from bandhan as its operations start in due course as a </p><p>bank. </p><p>From the above indicators it can be observed that Bandhan has a stable financial structure, which would allow it </p><p>to improve on its borrowings as a structured banking institution. It would require to infuse new capital in next </p><p>few months to support its long term plans. Its existing loan portfolio will also be further strengthen by starting </p><p>its activities as a bank. The asset quality of bandhan is good thus improving its ROA and ROE in long run. In all </p><p>the situation seems to be favourable to Bandhan to operate as a Bank. </p><p>But let us draw attention to certain challenges that can be a initial hindrance to Bandhans operations. </p><p>IV. CHALLENGES AHEAD </p><p>The transition from an NBFC to a bank, however, is not going to be as easy. There are many interviews where </p><p>Mr. Gosh points out to the probable challenges that the bank may face. In one of his interviews he said that We </p><p>only need to meet the SLR and CRR requirements." Well that is a big requirement, as banks have mandatory </p><p>obligations to maintain there is statutory liquidity ratio (SLR) and cash reserve ratio (CRR) at 21.50% and 4% </p><p>respectively. Bandhan may not face real difficulty with priority sector lending or rural branches, as its entire </p><p>portfolio is priority sector while the RBI's requirement is only 40 per cent. </p><p>Another challenge that can be faced is having an appropriate product basket for all. As it expands its business as </p><p>a bank, products too need to go through a change to cater to both rural and urban clients. Similar change would </p><p>also be required in the model of transactions. As an MFI, collateral free loans were disbursed which now would </p><p>be a difficult proposition to continue with. A better risk management approach would have to be adopted to </p><p>sustain and grow. </p><p>Geographical centre for operations can also be considered as a challenge. As trust is a major factor for banking, </p><p>there can be chances that the client base in rest part of India other than east may be willing to experiment with a </p><p>new bank. </p><p>Acquiring human resources from upper to lower level management will againbe a challenge. A bank needs </p><p>management driven with vision and clarity, setting up a board that can take the right directions and decisions </p><p>can be considered as one of the important factors. The existing staff is also a concern as most of them are either </p><p>graduates or undergraduates and Bandhan would need to acquire people with better qualification and skills to </p><p>improve on their banking dream. </p></li><li><p>520 | P a g e </p><p>Keeping the profitability for initial some years can be a concern as most capital would be utilised to set up new </p><p>operations, like increasing the number of branches, buying new technology, acquiring human capital, setting up </p><p>of ATMs etc. </p><p>Lack of technology can also be a hin...</p></li></ul>

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