A SUCCESSFUL MICROFINANCE TO BANK: A CASE STUDY OF

BANDHAN

Ms. Sheetal Thomas

Assistant Professor, Indukaka Ipcowala Institute of Management, CHARUSAT

Dr. Govind Dave

Dean, Indukaka Ipcowala Institute of Management, CHARUSAT

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 micro

lending 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

0
analysis of the probable challenges to be faced by Bandhan in its operations as a bank.

And Bandhans role in financial inclusion.

Key Words: Bandhan, Banking, Financial Inclusion, Microfinance.

_______________________________________________________________________

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.

Year Major Milestones

2001 Mr. Ghosh Start up Microfinance `. 2 lakh Initial Capital.
Expands microfinance activity to Kolkata, lunches 100 th branch. Reaches 100,000
2005
Clients.

2007 Ranked Indias 1st & worlds 2nd largest in Forbes list of top 50 microfinance firms.
Launches 1000th brand, covers 2 million clients. SIDBI buys 11% stake for `. 50
2009
Cr.
2010 Ties up with western Union for money transfer, loan disbursal rises To `.2000 Cr.

2011 IFC acquires 11% stake in the firm for `. 135 Cr.

Gets RBI licence to start a bank (Principal Approval). Has disbursed `. 29,990 Cr.
2014
to 5.5 million Clients so far

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The financing structure of Bandhan during its operations as an NGO as per

www.mixmarket.org is as follows :

Graph 1: Financing Structure of Bandhan as an NGO from 2003 to 2006

Capital/Asset Ratio Deposits to Total Assets

7.71%
8.00% 30.00%
20.00%21.78%20.67%
6.00% 4.04% 15.56%
2.79% 20.00%
4.00%
10.00%
2.00% 0.03%
0.00% 0.00%
2003 2004 2005 2006 2003 2004 2005 2006

Debt to Equity Ratio Gross Loan Portfolio to Total Assets

2,940.20 93.90%94.54%
84.81%
3000 100.00%
65.61%
2000
50.00%
1000
34.83 23.73 11.96
0 0.00%
2003 2004 2005 2006 2003 2004 2005 2006

From the above graphs it can be found that Bandhan had a stable financial structure, it

can be noticed that the capital asset ratio and gross loan portfolio to total assets have

constantly increasing showing better capital planning and loan disbursements.

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

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 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)1.

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 follows2:

Table 1: Loan products offered by Bandhan Financial Services Pvt. Ltd

Loan
Loan Size
Product Name Term % Female % Urban Loan Purpose
Range (`)
(Months)
Other, It can be used only
Suraksha Loan for emergency health
1,000 - 10,000 12 100% 20% - 40%
(Health Loan) 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

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.

1 Bandhan monthly bulletin.

2 http://www.mftransparency.org/microfinance-pricing/india/010-
Bandhan/Retrived on 12-4-15

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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 re-

silience 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 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 un served & understand segments. According (2012 World bank) document

only 35% of Indian adults have access to formal banking services3.

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

3 CFO CONNECT, Article of Banking on Bandhan published in July 2014 (Page

no 21)

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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) 4.

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.

Financing Structure of Bandhan

4 Business Line news paper Bandhan news We will prove that serving the poor
is sustainable & cost effective for a bank date: 15 th Sept 2014

5
 Sr. YEAR
Ratio
No.: 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014
Capital /Asset
1 10.45% 13.82% 16.51% 16.87% 17.51%
Ratio
Debt To Equity
2 8.57 6.24 5.06 4.93 4.71
Ratio
Gross Loan
3 Portfolio to Total 78.37% 91.91% 87.95% 82.89% 91.07%
Assets
Return on Asset
4 3.56% 5.38% 6.30% 4.78% 5.14%
(ROA)
Return on
5 39.13% 41.56% 36.59% 26.85% 28.90%
Equity(ROE)
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) 5. 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.

Table 2: Indicative Ratios of Bandhan Financial Services Pvt. Ltd

1. Capital / Asset Ratio

Graph 2: Capital/Asset Ratio of Bandhan Financial Services Pvt. Ltd

5 http://www.businessworld.in/news/finance/banking/bandhan-idfc-get-on-the-
tough-road/1318457/page-1.html retrived on 2/4/2015

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 Capital/Asset Ratio

2013

2012

2011

2010

2009

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00%

The above graph 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. 6

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.7

2. Debt to Equity Ratio

Graph 3: Debt to Equity Ratio of Bandhan Financial Services Pvt. Ltd

6 Meehan (2004)

7 Standard and Poors (2007)

7
 Debt to Equity ratio

2013

2012

2011

2010

2009

0 1 2 3 4 5 6 7 8 9

The above graph 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 credit or a loan that can be

borrowed for, say, 10% and lent to clients at 24%). Therefore, it may be better for the

MFI to increase its liabilities, if possible, to increase its income-generating assets (its loan

portfolio).8 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. 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.

8 Retrieved from http://www.sa-

dhan.net/Adls/Technicalnotes/Technical_Notes_21.pdf on 1/4/2015

8
Graph 4: Gross Loan Portfolio to Total Assets Ratio of Bandhan Financial Services Pvt.

Ltd

Gross Loan Portfolio to Total Assets

2013

2012

2011

2010

2009

70.00% 75.00% 80.00% 85.00% 90.00% 95.00%

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 graph 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 contribution to the goal of financial

inclusion9.

9 Bandhan Microfinance Report 2014

9
4. Return on Asset (ROA) and Return on Equity (ROE)

Graph 5: Gross Loan Portfolio to Total Assets Ratio of Bandhan Financial Services Pvt.

Ltd

ROA and ROE

2013

2012

2011

2010

2009

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

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% respectively10. The above Graph 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.

10 Bandhan Microfinance Report 2014

10
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.

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.

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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 again be 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.

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.

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 to access 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

12
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."11

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

bringing large population to financial inclusion.

Bandhans Mr. Ghosh says in an 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 country12.

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 amount13.

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

11Retrived from http://articles.economictimes.indiatimes.com/2015-05-

16/news/62239381_1_financial-inclusion-banking-services-financial-literacy on
17/5/15

12 CFO CONNECT article of Banking on Bandhan Published in July 2014

13 Banking Frontiers magazine Feminine Inclusion Vol.13, No.3, Page no 19,

Published in July 2014

13
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.14

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

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

inclusion.
Keeping up to its main objective of poverty alleviation & women empowerment

by introducing organised banking services and products for women.

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

14 Article of Feminine Inclusion Published by Banking Frontiers, on July 2014

14
trust on their services become 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.

15
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