Bandhan, a leading microfinance institution (MFI), is one of only two organisations given a licence to set up a bank. As it gears up to start operations, Bandhan’s founder Chandra Shekhar Ghosh aims at extending services beyond credit to economically weaker sections who have been deprived of these services so far. Non-performing assets and defaulters are not an issue for his new bank, he says, but recruiting people for rural services will be a challenge. Excerpts from an interview with Lola Nayar:
What lessons will you bring from the MFI sector into the banking sector that will set you apart?
There is a huge unmet need for banking services in the rural areas. With a good, viable financial model, it is possible to meet the needs of the rural people. They are very committed, there is trust and even without any papers or collateral, the returns are very good. My learning is that it is important to understand the motive for borrowing and ensure investment is properly done. Building relationships helps you know the motives for their borrowing, and ensure it is properly used to benefit them. If trust is built, they are most happy to return the money.
What can an NGO-led bank do in a sector that already has many players?
Though we started as an NGO in 2001, we became a non-banking financial company (NBFC) in 2006-07. The banking institutions in the country are not evenly spread out. Geographically, the south has a greater penetration and presence of banking institutions, while it is just half in the northern and eastern zones. As an MFI, we are working mostly in the eastern region, including the Northeast, and in the north zone. As per RBI guidelines, we are currently providing services to a large number of under-served areas and groups and the economically weaker section. As an MFI, we are not serving the middle class or the higher class. As a bank, we will be able to better serve the economically poor as well as the urban middle class and upper class people.
Why seek a banking licence?
“In rural areas, it is important to know the motives for borrowing money and see it’s invested properly. If trust is built, they’re happy to return the money.”
You know Bandhan has been working as an MFI for the last 13 years. Till now, a huge number of people—almost 60 per cent—haven’t got banking services. These are people living in the eastern region, mostly in the interior rural areas. We are working with them but have been able to provide them only credit services. If we have to develop these areas or have higher GDP growth, we have to foster more entrepreneurs. These entrepreneurs will, in turn, generate more employment. As both unemployment and poverty are linked, we have to tackle them together to remove poverty, or at least reduce it. This will help in raising GDP growth. For having good and sustainable development and helping a large number of people, we need better financial services. Financial services should have four components—credit, deposit, remittance and insurance. If we wanted to provide all these four components to every citizen of the country, we needed to become a bank, which is why we applied for a banking licence.
What do you see as the biggest challenge ahead of you?
The biggest challenge, particularly in interior rural areas, is the lack of proper electricity supply. Secondly, internet connectivity is also not very good. These are core to the banking services. Besides these, we will, hopefully, not face a problem which the banking industry faces—that is, recruiting people from MBA institutions who are willing to work in rural areas. The lack of internet and other facilities like good hospitals and schools is a deterrent. The lifestyle is also different in rural areas. Even commuting daily from the city to remote rural areas may not serve the purpose. One of our advantages now is that we are recruiting people from rural areas and posting them in rural areas. Of course, when we start recruiting people from urban areas and posting them in rural areas, we will face challenges.
Are you planning a pan-India presence or would you be only in the eastern region where you have the maximum presence initially?
We are a pan-India organisation now serving in 22 states. With a low banking penetration in these areas, we would like to start operations in the 22 states where we have operations before gradually expanding to all other states.
Will Bandhan’s MFI activity get submerged or will it work as a separate entity?
The MFI activity will be merged with the bank.
How will you help the MFI sector that depends on cheaper bank funds to give loans at lower interest rates?
Interest rates depend upon cost of funds and the operational costs of the programmes. Certainly, we would like to have the opportunity to help the public and reduce the interest rate and cost of our funds. Of course, the cost of our funds will be a little bit reduced and we will be able to pass on the benefit to our customers.
Like other banks, would you focus on corporates?
No, we would not be focusing on the corporate part but would be looking more at microfinance institutions, the msme (micro and small and medium enterprises) segment, and the middle class, which is a huge segment, as well as the upper middle class.
What’s the size of loans you’ll give?
We are currently giving loans of up to Rs 20,000-50,000 per individual. But now, we will be designing products as per the demand of the MSMEs and SMEs as we would like to focus on the needs in those areas.
As an MFI, Bandhan has had a very credible track record of managing loan defaults. How will you bring that experience to the banking sector, which is beset with huge NPAs?
My experience in the MFI sector is that through close connections and weekly follow-ups with all our customers, we get to know their problems. It enables us to be helpful and them to be responsive. With the msme and sme customers, we hope the same strategy will yield similar results. In fact, here we don’t need weekly follow-ups. Instead, we hope to have monthly critical meetings with our customers to cut down on any risk of loan repayment defaults. Building up trust through constant contact works to reduce the risks, not the profile of the customer.
How many branches will you start with?
We will have 600 branches to start with. As for recruitment, we currently have 13,000 employees. We are in the process of assessing how many will be suitable for banking operations and what the gap is before we go to the market to recruit.