Banking Central | The making of Bandhan Bank and the end of an era as Ghosh plans to retire

Ghosh built Bandhan Bank from a microfinance company to a full-fledged bank over decades

Some 14 years back in 2010, then a fledgling microfinance industry, was knocked down by a spate of suicides by borrowers of in Andhra Pradesh. Coercive recovery tactics of some microlenders were blamed for the fiasco that eventually led the state, which was home to the highest number of microfinance institutions (MFIs), to promulgate an emergency ordinance.

All hell broke loose after what the industry termed as a draconian rule came into force. It severely restricted microlenders' operations as major business restrictions were imposed on collections and field visits. The blaze was so harsh that it spread even beyond the borders of Andhra. The collection rates fell sharply from 99 percent to less than 20 percent, inexorably driving the industry operations to a grinding halt.

An outlier

Bandhan has been one of the few non-bank finance company (NBFC) MFIs that survived the crisis. There were two main reasons why the Chandra Shekhar Ghosh brainchild remained unaffected. Bandhan didn’t have any major presence in Andhra Pradesh, the epicentre of the crisis, or in neighboring 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 working in Bengal suburbs. Ghosh, on the contrary, continued to receive funds and widened the credit kitty.

“Ghosh 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.

Ghosh wanted to grow Bandhan beyond the confines of an MFI to a pan\-India lender. Three years down the line, his dream came true when the the Reserve Bank of India (RBI) unveiled new rules in February 2013 and chose Bandhan and IDFC out of the 26 applicants for fresh banking licences.

Bandhan Bank started operations on August 23, 2015, possibly as 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. At that point, the company had 13,000 employees and 2,016 branches across 22 states. Bandhan, in which the World Bank arm International Finance Corporation, has a stake of 10.93 percent, had a capital base of Rs 1,100 crore at that point.

Among the 26 applicants seeking banking permit, there were a host of deep-pockets such as Aditya Birla Nuvo, L&T Finance Holdings, TATA Sons, Bajaj Finserv and Shriram Capital. Some of them later pulled out of the race, though. Then, how did Bandhan make the cut? Why did the regulator show faith on a microlending institution even while licking on the wounds of the 2010 crisis?

The answer lies in Bandhan’s strong track record as a microfinance company. Microlending business was a completely different ballgame even for experienced bankers. It involved door-to-door visits and personal relationships with borrowers - unlike big banks where transactions mainly take place in branches or online.

Ghosh understood the game. Over the years, he 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 opening of the bank, Ghosh said that the focus of the new bank will be low-income borrowers. “My commitment to the poor remains intact,” he said. “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 had over 60 percent of its loan book in microlending. Ghosh has grown the bank with the same customer segment he understands and the strategy that has worked out fine so far.

Sweet shop owner's son makes a banker

The story of Bandhan Bank is also the story of its founder Chandra Shekhar Ghosh. The name Bandhan, which means a bond for togetherness, reflects Ghosh’s close association with the credit-starved poor in the villages of eastern India. The journey that had started from microlending with an initial capital of Rs 2 lakh transformed into a listed banking entity over the next 15 years.

Ghosh was born to a family of sweetmeat makers that had migrated from Bangladesh to India. His father somehow managed to send him to Dhaka University to study statistics. In 1985, Ghosh began working for BRAC, an international development agency, based in Bangladesh. BRAC imparted the basic training before deploying him as a field officer in one of the most poverty-stricken areas.

On returning to India, Ghosh involved himself with several non-government groups working with the poor in Bengal. That was the time when Ghosh entered the world of microfinancing. In the following days, he learned the nuances of microlending and formed Bandhan. Ghosh started off in 2001, giving away tiny loans to help the poor in Kolkata suburbs 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 the money.

In the early days, Ghosh had only two colleagues - Partha Samanta and Fatik Bera - when he started to giving loans as small as Rs 1,000, to poor borrowers in Konnagar and nearby Bagnan areas. According to him, a flat interest rate of 15 percent was charged on the loan. The borrowers hardly understood the concept of a loan without collateral. Until then, they had only seen moneylenders who snatched their collaterals if they failed to pay back.

Promoter holding hurdles

After Bandhan Bank was formed, the RBI had given three years to bring down the promoter holding to 40 percent. The failure to bring down the stake within the stipulated time resulted in the 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. The RBI later on removed the restrictions on opening branches and, in August, lifted the freeze on the CEO’s salary.

Over the years, Bandhan grew its business presence aggressively. The bank now runs 6,250 banking outlets, including branches, ATMs and other touch points, across the country. Its loans and advances reached Rs 1.28 lakh crore at the end of the fourth quarter of fiscal 2023-24while deposits grew to Rs 1.35 lakh crores with a 25.1 per cent rise year-on-year.

And the ride turned rough

Ghosh decided to step down as the managing director and chief executive of Bandhan Bank after his tenure comes to an end in July 2024.

His decision to exit comes a time when the bank is at a critical juncture. Fresh asset quality concerns may be emerging in the microloans segment which constitutes a significant share of the bank's book even today. Also, the National Credit Guarantee Trust Company (NCGTC) is conducting a forensic audit on about Rs 23,300 crore of loans disbursed by Bandhan Bank under the government's credit guarantee scheme.

The NCGTC has flagged that the loans were either evergreen or that Bandhan Bank created fictitious accounts to obtain the maximum guarantee cover. It suspects that Bandhan Bank created fictitious accounts to apply under both CGFMU and ECLGS schemes in order to get the maximum guarantee cover. It also fears that some loans under the CGFMU scheme were evergreened. Evergreening is the practice of extending new or additional loans to a borrower unable to repay existing loans, thereby concealing the true status of an NPA or bad loan.

CGFMU are loans amounting to about Rs 20,800 crore in respect of around 29 lakh borrowers under the Credit Guarantee Fund for Micro Units. In this category, micro and small enterprises can avail of collateral-free credit. ECLGS are loans amounting to about Rs 2,500 crore in respect of around 22 lakh borrowers under the Emergency Credit Line Guarantee Scheme (ECLGS) announced as part of the Aatmanirbhar Bharat Package in 2020, during the Covid-19 crisis.

In an analyst call, the bank had said that the NCGTC audit has no relations with the CEO’s exit. But analysts aren't convinced about the reasons cited for the sudden change at the top. Ghosh recently told Moneycontrol that his decision to step down was voluntary. Yet, there have been media reports speculating whether the banking regulator too had a say in his exit.

Ghosh will continue with Bandhan Bank even after his retirement in a ‘strategic role’ advising the group’s other businesses as well. The investors are watching. The bank has formed an internal committee to find Ghosh’s successor. Bandhan Bank’s share prices have tumbled by around 61 per cent from an all-time high of Rs700 in a piece in August 2018 to Rs 183 apiece now. Ghosh’s successor has a mammoth task at hand in regaining the lost investor confidence.

Part of the story was carried out by Moneycontrol in August 2020

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