Bandhan Bank 5 years on: The story of a sweet shop owner’s son who built a thriving private lender

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In late 2010, suicides by borrowers owing to the coercive collection tactics of microlenders prompted Andhra Pradesh, which had the highest concentration of microfinance institutions (MFIs), to promulgate an ordinance.

The ordinance severely restricted microlenders' operations. Even lenders outside the state felt the heat.

Collection rates fell from 99 percent prior to the ordinance to less than 20 per cent. One of the few NBFC-MFIs which survived the crisis, and even thrived in the post-crisis period, was Bandhan, founded by Chandra Shekhar Ghosh.

Andhra crisis lessons

There were two main reasons why Bandhan remained unaffected. Bandhan didn’t have any major presence in Andhra Pradesh, the epicentre of the crisis, or in neighbouring states.

Second, the funding squeeze that affected most MFIs in the aftermath of the crisis (banks shut doors overnight to MFIs) didn’t affect Bandhan. On the contrary, Ghosh continued to get funds and gave more loans to borrowers.

“He had his ear to the ground. He knew exactly what was happening with borrowers. Bandhan continued to get funds and continued to give new loans when most other firms came to a standstill,” said Kishor Kumar Puli, who used to head Trident Microfinance, which was hit hard in the Andhra Pradesh crisis.

Banking entry

Bandhan applied for a bank permit when the Reserve Bank of India (RBI) unveiled new rules in February 2013. Of the 26 applicants, two turned lucky — Bandhan and IDFC. Bandhan Bank started operations on August 23, 2015. Bandhan is possibly the first microlending institution to get a full banking licence in India. As of March 31, 2014, it had a loan book of Rs 6,200 crore and 5.4 million borrowers.

The company had 13,000 employees and 2,016 branches in 22 states. Bandhan, in which the World Bank arm International Finance Corporation, has a stake of 10.93 per cent, had a capital base of Rs 1,100 crore at that point.

Among the 26 applicants , there were several big names with deeper pockets. They included Aditya Birla Nuvo, L&T Finance Holdings, TATA Sons, Bajaj Finserv and Shriram Capital. A few of them later pulled out of the race.

How did Bandhan make the cut?

Why did the regulator show faith on a microlending institution while the memories of the 2020 crisis were still afresh? The answer lies in Bandhan’s strong track record. Over the years, it had built a microlending institution that had a significant reach in the eastern part of the country, where the banking penetration was poor.

That was precisely one of the licensing prerequisites of the RBI — promotion of financial inclusion. No one knew its true meaning better than Ghosh.

The RBI set the minimum entry capital at Rs 500 crore. Promoters were required to set up a wholly owned Non-Operative Financial Holding Company (NOFHC). Bandhan Bank was formed under the holding structure of Bandhan Financial Ltd.

In his first press conference in Mumbai after the inauguration of the bank, Ghosh said that the focus of the new bank will be low-income borrowers. “My commitment to the poor remains,” said Ghosh. “They continue to be my focus and the bank would offer more services to them.”

That promise has been kept till now. As of June 30, 2020, Bandhan still has over 60 per cent of its loan book in microlending. Ghosh has grown the bank with the same customer segment he understands and the strategy has worked out fine so far.

 Journey of a sweet shop owner’s son

Bandhan Bank’s growth story is also the life story of its founder, Ghosh. The meaning of the word ‘Bandhan’ is bond or togetherness. His bond with the credit-deprived poor in eastern India’s villages and a Rs 2 lakh loan were the initial capital for Ghosh to begin an MFI, Bandhan Financial Services Ltd, and grow it into a private bank in less than 15 years.

Ghosh was born into a family of Bangladeshi refugees and his father had a tiny sweet shop. Ghosh’s father struggled to give him good education, but somehow managed to send the boy to Dhaka University to study statistics. In 1985, Ghosh started working for BRAC, an international development agency, based in Bangladesh.

The organisation trained him and appointed him as a field officer in one of the most poverty-stricken areas. Later, Ghosh involved himself with several NGOs working with the poor in West Bengal.

That period also initiated Ghosh into the world of microfinance. In the following days, he learned the nuances of microfinance and formed Bandhan in West Bengal.

Ghosh started out as a worker in a non-governmental organisation (NGO) in 2001, giving tiny loans to help the poor in Kolkata's suburban town of Konnagar. Besides the Rs 1.75 lakh borrowed from a local moneylender at an interest rate of 7.5 percent per month, the Rs 25,000 borrowed from Ghosh’s sister and brother-in-law was the only capital for his work as no commercial bank was willing to give him money.

In the early days, Ghosh had only two staff members — Partha Samanta and Fatik Bera. The group started to give small loans, as small as Rs 1,000, to poor borrowers in Konnagar and nearby Bagnan areas in Kolkata suburbs.

According to Ghosh, a flat interest rate of 15 percent was charged. The borrowers hardly understood the concept of loan without collateral. Until then, they had only seen moneylenders who snatched their collateral if they failed to pay back.

Promoter holding issue

After Bandhan Bank was formed, the RBI had given three years to bring down the promoter holding to 40 per cent. The failure to bring down the stake within the stipulated time resulted in RBI’s punitive actions in September 2018.

The banking regulator froze the remuneration of Ghosh and barred Bandhan Bank from opening new branches.

In August, Bandhan Financial Holdings, the holding company of Bandhan Bank, brought down its stake in the lender to 40 percent from around 61 percent through a block trade. The holding company sold the stake worth around Rs 10,500 crore. In February, the RBI removed the restrictions on opening branches, and, in August, lifted the freeze on the CEO’s salary.

Challenges ahead

In five years, Bandhan Bank has grown its loan book to Rs 74,300 crore and deposits to Rs 60,600 crore. It has received investments from global investors, including Singapore’s Caladium.

Only one thing has remained unchanged—the big bet on microcredit business.

Out of its total customer base of 20.31 million, 15.46 million are micro banking customers. Out of the total loan book of Rs 74,300 crore, Rs 47,500 crore, or around 64 per cent, are micro loans. This includes individual loan portfolio, amounting to Rs 2,200 crore.

The high reliance on microcredit is both a strength and a weakness. The bank understands this business well. At the same time, in a COVID-hit economy, low-income segments will likely get hit the most, going ahead.

In a recent report, Goldman Sachs highlighted key risks to Bandhan Bank, including aggressive growth in top-up loans, relapse of slippages in Assam due to floods, social and local issues in home markets, failure to convert depositors into a revenue opportunity over the medium term and lack of synergies in the affordable housing business.

In the aftermath of COVID, the RBI has declared a moratorium on term loan EMIs till August 31, 2020. Banks are expecting a rise in bad loans, once the moratorium is lifted. That’s another challenge awaiting Bandhan Bank.