Bandhan: The Making of a Bank
Book by Tamal Bandyopadhyay
Book Summary
BANDHAN BANK is eastern India’s first bank since Independence and a paradox in many ways. It came out of a region that, despite being home to the country’s first banks (Courtesy: East India company), is also the most underbanked. It is founded by Chandra Shekhar Ghosh, who comes from a non-traditional background for banking.
Ghosh, the son of a sweet shop maker, spent his early life in Bangladesh in poverty. To support his father’s income, he started working while attending college. After completing his post-graduation, he started working with the Bangladesh Rural Advancement Committee, a development organization dedicated to the alleviation of poverty and the empowerment of the poor. The most critical learning that he picked & that helped him lay the foundation of Bandhan was that poor don’t care much about money if it’s given for free. He came to West Bengal in the late 1990s.
Ghosh was not in a happy place in West Bengal, struggling to make his ends meet while working at another NGO. Around the same time, he stumbled upon the enormous scope in organizing micro-lending. Bandhan was set up as an MFI NGO with that objective in 2001. It aimed to organize women through self-help groups & promote micro-entrepreneurship. It borrowed its model from ASA, the largest MFI in Bangladesh. Bandhan managed to get financing from SIDBI that helped it to scale in the initial years.
Over the next decade, Bandhan grew at a phenomenal pace. It was present in 18 states (except south India) by 2012 and lapped up equity investments from SIDBI & IFC, the investment arm of the World Bank. It was clear on bringing in only development organizations to its board warding off investments from PE players, albeit at higher valuations. It was also stern about not diluting control. As it grew, it also brought in newer products (larger ticket sizes) to help SMEs as their demand grew, formalized its org structure & computerized its processes. At the same time, it decided to pivot from non-profit NGO to for-profit NBFC. The rationale was to get credit from banks to scale further. As an NGO, the mode of funding was restricted to grants & accruals and limited its potential. Given bad loans were ~0.2% of the book, banks were willing to lend to Bandhan but wanted it to be regulated, thereby follow stricter capital adequacy norms laid down for financial entities.
During its growth, Bandhan faced many crises. They were managed prudently such that they did not become national issues. Bandhan had built a loyal base of borrowers & employees, which also helped. Many of Bandhan’s early employees came from similar backgrounds as that of borrowers. Hence they could naturally empathize with the borrowers. In case of default, borrowers would never be asked for money but would be counselled. This helped forged a stronger relationship with the borrower, and they would voluntarily pay back their dues. For employees, Bandhan had changed their lives by creating employment for thousands in West Bengal.
Another critical fact was that Bandhan is an exceptionally tightly run organization. All operations are laid down by Ghosh in the minutest details in a manual that every Bandhan employee needs to understand and follow to the T. This has ensured standardized procedures and successful replication of the Bandhan model across the country.
The next phase marks Bandhan’s journey to becoming a bank. The rationale, here again, was to expand its sources of funding. The work to present a credible application, supported by a robust business model, to RBI began in 2013. To integrate MFI branches with bank branches, a hub & spoke model was adopted. Every branch (hub) would be linked to DSCs (microfinance branches) where excess cash would be kept. It received the license in 2014 after on boarding GIC as a new equity investor and increased stakes of SIDBI & IFC to bring public shareholding to 51% in the entity.
Bandhan, as an MFI entity, has been hugely successful. However, there are questions if it will be able to replicate its success as a universal bank. Banking is different from MFI on two fronts — one, it’s a regulated business, and second, while MFI is a seller’s market, banking is a buyer’s market. While the breakneck pace of growth worked for MFI business, banking requires a much more prudent approach. In banking, what one doesn’t do becomes more important than what one does.
Bandhan plans to continue its focus on providing small loans. It intends to mobilize deposits from urban areas and disburse as small loans. However, the challenge here lies in securing deposits when customers prefer to bank with entities that can give the entire suite of services. Additionally, as an MFI, it never loaned money to men. As a bank, it can no longer do that. Its staff is skilled in disbursing loans, but collecting deposits requires different skill sets. Hence it needs to build capabilities on both fronts. On the bright side, Ghosh’s non-traditional background arms him with a fresh perspective and Bandhan’s social cause does differentiate It from its ilk.
