Whatever risks the Reserve Bank of India, under the leadership of Raghuram Rajan, may have taken while granting a banking licence to the microfinance institution Bandhan, have been vindicated by its first year’s performance. In a year, Bandhan has been able to garner deposits of Rs 15,500 crore, which nudges its total advances of Rs 16,000 crore. The whole idea of getting a bank licence is to be able to accept deposits so that the organisation does not have to lend out of costly borrowings from banks. By accessing deposits at around seven per cent, Bandhan is able to save more than three per cent, as banks typically lend to microfinance institutions at 10 per cent plus. It is, therefore, unsurprising that, in the past year, Bandhan has been able to cut the interest rate at which it lends to its millions of small borrowers even as it has paid slightly above the market for its deposits.
Bandhan raised a few eyebrows when it opened well-appointed branches in well-off urban middle-class areas, but now it is clear that this strategy has played an important role in its deposit-mobilisation efforts. Anecdotal evidence suggests that depositors in eastern India, particularly West Bengal, have shifted a few their deposits to Bandhan to earn a little bit more without having any qualms about putting their money in a new bank. In view of this, none will quarrel with Bandhan’s plan to take its branches to urban high-income areas.
Even as Bandhan has gone into new geographies to mobilise deposits, it has remained conservative in its lending strategy. It has continued to primarily grant small loans, mostly to the rural poor, and made a cautious foray in lending to the MSME (micro, small and medium enterprise) sector, while largely staying away from corporate lending. There is tremendous scope for pursuing this lending strategy in the medium term, as for all its recent high growth there is still a huge untapped market for microfinance loans. In view of the fact that the best-run private sector banks have seen decent asset growth in the retail sector, Bandhan can hope to grow its loan portfolio at a rapid rate by simply hand holding their proven microfinance customers into higher cycles of lending. There is also enormous scope for granting housing loans to the more successful microfinance customers who may not have absolutely pucca titles and documentation. Plus, there is no end to the amount of resources that small family-owned businesses can absorb as they expand their operations.
While celebrating the success of microfinance, which has been recognised by the RBI in giving small finance banking licences mostly to microfinance organisations, it is difficult not to see the contrast that is posed by the large public sector banks, which are down in the dumps, having to write off huge amounts of bad loans and requiring massive recapitalisation from the tax payer’s money. Unsecured loans to the poor was a risky area that public sector banks, with the city-bred staff, entered very reluctantly. In the event, the poor borrowers have been disciplined in repayment, allowing the microfinance institutions to have non-performing assets of one per cent or less. It would , however, be interesting to see whether Bandhan is able to sustain its report card, going forward.