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    A SUCCESSFUL MICROFINANCE TO BANK:A

    CASE STUDY OF BANDHAN

    Ms. Sheetal Thomas1, Dr. Govind B Dave

    2

    1Assistant Professor,

    2Dean Indukaka Ipcowala Institute of Management, CHARUSAT (India)

    ABSTRACT

    There are not many reports about the role of commercial banks in microfinance. This can be due to a large

    level of absence in the field. Microfinance in general does not attract commercial banks. Due to this absence of

    mainstream commercial banks the microlending activity was taking over by large number of nongovernmental

    organizations popularly known as NGOs.This paper aims to study Bandhan as a case study from its

    inception as an NGO to its performance as a bank. The first half of the paper is dedicated towards highlighting

    its financial structure as an NGO and an NBFC. The paper further analysis its financing structure in last 5

    years. Finally the paper concludes with an analysis of the probable challenges to be faced by Bandhan in its

    operations as a bank. And Bandhans role in financial inclusion.

    Keywords: Bandhan, Banking, Financial Inclusion, Microfinance.

    I. INTRODUCTION

    Bandhan was christened in 2001 under the able leadership of Mr. Chandra Shekhar Ghosh, a Senior Ashoka

    Fellow. The meaning of bandhan is togetherness and its mission and vision reflects its name. The main thrust of

    Bandhan is social upliftment and economic emancipation of women who are socially disadvantaged and

    economically exploited. To achieve their objective, Bandhan engages in the delivery of microfinance services to

    the poor women residing in rural and urban areas across the country.

    Bandhan has been engaged in the delivery of microfinance service for the last 13 years. The model followed is

    individual lending through group formation. Bandhans commitment towards triple bottom-line values is

    strongly asserted by its intervention in development activities.

    The financing structure of Bandhan during its operations as an NGO as per www.mixmarket.org is as follows:

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    TABLE1: Financing Structure of Bandhan as an NGO from 2003 to 2006

    Figure: 1-Capital Asset Ratio Figure: 2- Deposits to Total Assets

    Figure 3:- Debt to Equity Ratio Figure 4:- Gross Loan Portfolio to Total Assets

    From the above figures it can be found that Bandhan had a stable financial structure, it canbe noticed that the

    capital asset ratio and gross loan portfolio to total assets have constantly increasing showing better capital

    planning and loan disbursements.

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    As of February 2015, it operates approximately 2,022 branches in 22 states and union territories in India.

    Covering 246 districts, with 175 under banked districts. Bandhan has 15,956 staff that cater to 1,34,37,340

    clients. Out of which 63,66,296 are active borrowers-all women. The cumulative loan disbursement amounts to

    ` 4,43,778 million out of which outstanding loans amount to to ` 89,079 million. Bandhan offers loans for

    microenterprises and health emergencies and is led by Chairman and Managing Director Chandra Shekhar

    Ghosh. Bandhan's past investors include Punjab National Bank (PNB) and Small Industries Development Bank

    of India (SIDBI)

    As of March 2014, it reported return on assets (ROA) of 5.01 percent and return on equity (ROE) of 28.24

    percent.

    Some of the loan products offered by Bandhan are as follows

    TABLE 2: Loan Products Offered by Bandhan Financial Services Pvt. Ltd

    Product Name Loan Size Range

    (`)

    Loan Term

    (Months) % Female % Urban Loan Purpose

    Suraksha Loan

    (Health Loan) 1,000 - 10,000 12 100% 20% - 40%

    Other, It can be used only for

    emergency health needs. , Can

    NOT be used for business

    Suchana Loan 1,000 - 15,000 12 100% 20% - 40% Business

    Srishti Loan 16,000 - 50,000 24 100% 20% - 40% Business

    Susikhsha Loan 1,000 - 10,000 12 100% 20% - 40% Education

    Fisheries Loan 10,000 - 50,000 12 - 24 80% - 100% 20% - 40% Business

    II. BANDHAN FROM NGO TO A BANK

    Bandhan started as an NGO and in 2006 got its status as an NBFC. It further grew into becoming one of the first

    MFIs to have granted a banking licence. But why does it need a banking licence, while it does the basic activity

    of banking i.e. lending.

    Even though NBFCs perform functions similar to that of banks, there are a few differences. One of them is that

    an NBFC cannot accept demand deposits, it is not a part of the payment and settlement system and as such, an

    NBFC cannot issue cheques drawn on itself; and deposit insurance facility of the Deposit Insurance and Credit

    Guarantee Corporation is not available for NBFC depositors, unlike banks.

    Over the past couple of years, the Indian banking sector has displayed a high level of resilience in the face of

    high domestic inflation, rupee depreciation and fiscal uncertainty in the US and Europe. This has necessitated

    the banks in India to concentrate much more on operating efficiency, outsourcing and cost optimization now

    than ever before. With deregulation of savings bank rate and bleak global economy, the banks are focusing on

    alternative sources of revenue, like fee income, trade and vendor financing, geographic expansion et al to

    maximize their revenues. The Banking sector in India has adopted and embraced technology to keep pace with

    the international development in the banking industry and offer quality products to its clients. Technology has

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    enabled banks to conceive and deliver products that are more in line with the requirements of its clients on the

    one hand and also more cost efficient on the other.

    Reserve Bank of India (RBI)intended to widen the reach of the `84 trillion banking industry to unserved

    &understand segments. According (2012 World bank) document only 35% of Indian adults have access to

    formal banking services.

    Granting banking licence to Bandhan, a leading microfinance institution (MFI), is the first step towards this. As

    it gears up to start operations, Bandhans founder Chandra Shekhar Ghosh aims at extending services beyond

    credit to economically weaker sections who have been deprived of these services so far. Nonperforming assets

    and defaulters are not an issue for his new bank, he says, but recruiting people for rural services will be a

    challenge. Bandhan borrows fund at 12 to 13% & to disburse them among the borrowers. Bandhan has different

    levels of challenges & must quickly put it all together within 18 months will have to set itself up as a full fledge

    bank where its role will no longer be restricted to meet lending but will also get into the other aspects like,

    collecting deposits among other like any other bank.

    Mr. Ghosh also quotes about their strategy to start a bank he said Even as it is set to transform itself from a

    microfinance institution to a bank, Bandhan promises to maintain the poor as their target for loans & advances.

    Our existing captive customers are poor economically backward people with less than `50,000 income per year,

    we all now trying to target those with income above `50,000 per year. He said that the physical touch is more

    important to reduce NPAs (Nom Performing Assets)

    With microfinance continuing to be Bandhan's spine, the next big question that needs to be resolved is of the

    choice of its banking model. Bandhan is among the first generation MFIs and follows the Grameen model of

    banking. Under this model, credit decisions are taken at the branch level, which facilitates quick disbursal of

    loan in about a day's time. New generation MFIs like Ujjivan and Janalakshmi, on the other hand, follow the

    retail banking model, where credit is disbursed after credit appraisal at a centralised unit. In these MFIs, the

    credit disbursal usually takes about five days.

    Bandhan is startlingly different from the other institution that has also been granted a banking licence IDFC

    Ltd. In terms of client profile, management bandwidth and asset size, the two are a study in contrast. There

    would be number of challenges that they have to face before they make it to be good banks in the country.

    III. FINANCING STRUCTURE OF BANDHAN

    TABLE 3: Indicative Ratios of Bandhan Financial Services Pvt. Ltd

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    In April 2014, Bandhan had an outstanding loans of `5,704 crore; its net worth was ` 1,100 crore (` 96 crore in

    equity with a capital adequacy ratio of 21 per cent). Its capitalisation is expected to be sufficient to support its

    growth in coming years. The capital adequacy ratio is increasing and it is a positive indicator. It also shows that

    the net worth of Bandhan is increasing thus would help them to attract more investments.

    3.1 Capital / Asset Ratio

    Figure 5:Capital/Asset Ratio of Bandhan Financial Services Pvt. Ltd

    The above figure shows the Capital/ Asset ratio of Bandhan MFI of last 5 year. It can be found that there is a

    gradual increase in the capital asset ratio for years. Most of the MFIs have a CAR (using Tier 1 only) well

    above the 8% minimum. This is appropriate, as analysts suggest that minimum capital adequacy for MFIs

    should exceed the Basel II recommendations by at least 50%, i.e. that MFIs should maintain CAR of 12% or

    higher. MFIs should have a larger capital buffer for several reasons: first, delinquency rates for MFIs can be

    volatile; second, MFI operating expenses are generally higher than for commercial banks; and third, access to

    funds for emergency recapitalization is more limited.

    3.2 Debt to Equity Ratio

    Figure 6:Debt to Equity Ratio of Bandhan Financial Services Pvt. Ltd

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    The above figure indicates the debt equity ratio for last five years. It is important for all organisations to

    maintain a proper balance between debt and equity.If an MFI has a large amount of equity and very little debt, it

    is likely to limit its income generating potential by not making use of external sources of debt (that is, a line of

    creditor a loan that can be borrowed for, say, 10% and lent to clients at 24%). Therefore, it maybe better for the

    MFI to increase its liabilities, if possible, to increase its income-generating assets (its loan portfolio). However

    if DER increases rapidly, it can be said that the MFI is approaching its borrowing limits and this can have an

    hindrance to growth. In case of Bandhan the MFI has decreasing DER which improves its borrowing capacity

    for future expansions planned.

    3.3 Gross Loan Portfolio to Total Assets

    The Gross Loan Portfolio to Total Assets ratio indicates the proportion of the core earning assets of the MFI.

    Figure 7: Gross Loan Portfolio to Total Assets Ratio of Bandhan Financial Services Pvt. Ltd

    Credit is the flagship service offered by MFIs to clients outside the net of formal financial services. For MFIs,

    loan portfolio is the primary revenue generating asset. It also gives details about the health of MFIs. The above

    figure shows that Bandhan has increased its gross loan portfolio to total assets y-o-y and stands at 91.07% in

    fiscal year 2013, and is also the first among top 10 MFIs in with ` 6107 crore in loan portfolio. It also is an

    indicator to the performance of the institution and its contributionto the goal of financial inclusion.

    3.4. Return on Asset (ROA) and Return on Equity (ROE)

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    Figure 8: Gross Loan Portfolio to Total Assets Ratio of Bandhan Financial Services Pvt. Ltd

    Return on Asset (ROA) and Return on Equity (ROE) are the two profitability measures that the MFIs and their

    investors generally consider for judging the viability of their MFIs. The sector-average ROA and ROE are

    generally viable and healthy at a median range of 1.94% and 9.25% respectively.The above Figure represents

    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

    increase 5.38% so it indicates that Bandhan generating earnings based on their assets. In year 2013-14 the ROA

    is 5.14%. The ROE was lowest for the year 2012 at 26.85% but revived by increasing by 2.05% in 2013 at

    28.90%. It can also be noted that the lag period was due to the crisis microfinance faced in recent past. It

    indicates that investors can have positive expectations from bandhan as its operations start in due course as a

    bank.

    From the above indicators it can be observed that Bandhan has a stable financial structure, which would allow it

    to improve on its borrowings as a structured banking institution. It would require to infuse new capital in next

    few months to support its long term plans. Its existing loan portfolio will also be further strengthen by starting

    its activities as a bank. The asset quality of bandhan is good thus improving its ROA and ROE in long run. In all

    the situation seems to be favourable to Bandhan to operate as a Bank.

    But let us draw attention to certain challenges that can be a initial hindrance to Bandhans operations.

    IV. CHALLENGES AHEAD

    The transition from an NBFC to a bank, however, is not going to be as easy. There are many interviews where

    Mr. Gosh points out to the probable challenges that the bank may face. In one of his interviews he said that We

    only need to meet the SLR and CRR requirements." Well that is a big requirement, as banks have mandatory

    obligations to maintain there is statutory liquidity ratio (SLR) and cash reserve ratio (CRR) at 21.50% and 4%

    respectively. Bandhan may not face real difficulty with priority sector lending or rural branches, as its entire

    portfolio is priority sector while the RBI's requirement is only 40 per cent.

    Another challenge that can be faced is having an appropriate product basket for all. As it expands its business as

    a bank, products too need to go through a change to cater to both rural and urban clients. Similar change would

    also be required in the model of transactions. As an MFI, collateral free loans were disbursed which now would

    be a difficult proposition to continue with. A better risk management approach would have to be adopted to

    sustain and grow.

    Geographical centre for operations can also be considered as a challenge. As trust is a major factor for banking,

    there can be chances that the client base in rest part of India other than east may be willing to experiment with a

    new bank.

    Acquiring human resources from upper to lower level management will againbe a challenge. A bank needs

    management driven with vision and clarity, setting up a board that can take the right directions and decisions

    can be considered as one of the important factors. The existing staff is also a concern as most of them are either

    graduates or undergraduates and Bandhan would need to acquire people with better qualification and skills to

    improve on their banking dream.

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    Keeping the profitability for initial some years can be a concern as most capital would be utilised to set up new

    operations, like increasing the number of branches, buying new technology, acquiring human capital, setting up

    of ATMs etc.

    Lack of technology can also be a hindrance as their clientele would belong mostly to rural parts where internet

    connectivity is minimal. This would restrict bank from using latest methodologies of online banking.

    The bank may also face stark competition from other commercial banks, these may not be active in rural

    markets, but would have a strong urban client base.

    Bandhan has to start its banking activities by October 2015, a fare enough time it has received to iron out the

    challenges and give banking a new usher of hope.

    V. THE DREAM OF FINANCIAL INCLUSION

    India is a county where still a large population is very poor, financial inclusion is of great importance to them. It

    is a major challenge for the poor toaccess secured and organized finance options. Ensuring the optimum

    utilization of the resources they possess is also difficult. Economic and societal uncertainties mean volatility in

    their income can have an adverse reaction on the financial stability. Many a times exposing them to unorganized

    financial help like money lenders and small time lending institutions. The hope of financial inclusion now lies

    with banks, both private and public. In a speech last year the RBI, Deputy Governor, S S Mundra says,

    "according to census 2011, out of 24.67 crore households in the country, only about 14.48 crore or 58.70 %

    households had access to banking services. Further, of the 16.78 crore rural households, only about 9.14 crore

    or 54.46 % households were availing of banking services.

    Now there lies a big scope for Bandhan to come forward and play an important role in bringing large population

    to financial inclusion.

    BandhansMr. Ghosh says inan article that its core commitment to the marginalised section will give it an edge

    over other banks while they serve all communities of the society, they will continue to serve the poor in fact,

    and they will have a separate head that will look into the underprivileged section of the society. They will serve

    the poor to began with it will start with 600-700 branches across the country

    He also added that they would introduce the Human Teller Machines (HTMs) rather than ATMs. This could

    reduce Non Performing Assets (NPA) because personal touch with human can help to understand their

    requirement about financial products & services & also know about their capacity to repay the loan amount.

    As a bank, Bandhan will have access to low-cost savings deposits which will help it reduce lending rates in the

    future. With its conversion into a bank, 30 lakh of its existing borrowers who don't have bank accounts till now

    will come into banking fold automatically.

    Bandhan can play a very important role in financial inclusion in India by taking up the following.

    Providing financial literacy & awareness for financial empowerment

    Providing loans only for productive purposes

    Providing loans for education of their children and the loan range is `1000 to 10000. For books & fees etc.

    & also provide health loan, emergency health requirement & sanitation purposes.

    For real financial inclusion they need to target families and work for their up liftment.

    Increased emphasis on grassroots level banking for maximum reach and financial inclusion.

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    Keeping up to its main objective of poverty alleviation & women empowerment by introducing organised

    banking services and products for women.

    VI. CONCLUSION

    Nassim Nicholas Taleb quotes that Banking is a very treacherous business because you don't realize it is risky

    until it is too late. It is like calm waters that deliver huge storms. We want to believe that it would not be so

    risky for Bandhan to operate as a bank. With an experience of 13 years as a successful MFI, it wont be difficult

    to start its operations. Their financial status is good and many organisations have started funding their project by

    now. The bank and its CMD are determined to stick to their main objective that is to provide financial

    products& services in unbanked rural area and to achieve the financial inclusion through women empowerment

    & provide employment for alleviation of poverty in rural area. Currently bandhans main asset is their existing

    customers and their trust on their services becomes a major step in setting up of a bank. Their unique ways of

    working would lead Bandhan as one of the successful banks in banking sector.

    REFERENCES

    [1]. Baru M, Bandhan Bank will serve rural East in india: CMD Ghosh. Bureaucracy Today (BT) , 2014, 36-37.

    [2]. Bhoumik I, Bandhan picks Deloitte to help in banking entry. Live Mint , 01. 2014.

    [3]. Bose A. L, Bandhan Bank will usher in a new model in financial inclusion: CMD. Business Line , 2014,

    01-02.

    [4]. Chaudhuri B. R, Transition from NBFC to Bank. IMI Konnect, 03 (05), 2014, 01-08.

    [5]. Christen, Robert Peck, Elisabeth Rhyne, Robert C. Vogel, Cressida McKean, Maximizing the Outreach of

    Microenterprise Institutions: An Analysis of Successful Microfinance Programs, USAID Program and

    Operations Assessment Report, No. 10, U.S. Agency for International Development, Washington, D.C.

    1995

    [6]. Estelle Berger, Addressing Capital Adequacy for MFIs: A Risk Management Approach.2010

    [7]. Ghosh. D, Chandra Shekhar Ghosh's Bandhan banks on building ties with the underprivileged. Forbes

    India Magazine , 2014, 01-04.

    [8]. Meehan, Jennifer, Tapping the Financial Markets for Microfinance: Grameen Foundation USAs

    Promotion of this Emerging Trend. New York: Grameen Foundation USA. 2004.

    [9]. Nayer L, As a Bank we can give more than just Credit. OUTLOOK , 2014, 01-05.

    [10]. Rebello, J, Villages will be base from which Bandhan will expand: Chandra Shekhar Ghosh. Livemint ,

    2014, 01-06.

    [11]. Standard & Poors (2007) Microfinance: Taking Root in the Global Capital Markets. New York.

    [12]. Tara S. Nair and Ajay Tankha, Inclusive Finance India Report 2014. Oxford University Press.

    [13]. The Bharat Microfinance Report 2014, Sa-Dhan, Delhi.

    [14]. Venugopalan Puhazhendhi, Microfinance India State fo Sector Report 2012

    [15]. Agrawal M, Feminine Inclusion. Banking Frontiers, 13 (03), 2014,16-19.

    [16]. www.bandhanmfi.org

    [17]. http://mixmarket.org/mfi/bandhan

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    [18]. http://www.rediff.com/business/report/interviewhowbandhanfinancialplanstorunauniquebank/20140403.ht

    m

    [19]. Various news paper articles.

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