Microlender to bank: a good move?

bandhan logoBandhan, a Kolkata-based microfinance company serving poor rural women, which received a provisional licence from the Reserve Bank of India for launching banking business last April, has now secured its formal licence – one of just two general banking licenses awarded by the RBI.

Over time, the state-controlled Small Industries Development Bank of India, the International Finance Corporation, the World Bank’s private lending arm and in 2011 the IFC and GIC, Singapore’s sovereign wealth fund, took equity stakes in Bandhan, raising Bandhan’s capital base well above the RBI requirement.

Chandra Shekhar Ghosh, a Bangladesh-educated social entrepreneur, set up the organisation in 2001 in Kolkata, a pioneer in eastern India of the kind of microfinance he had seen flourish in Bangladesh.

bandhan borrower

From about 2,000 branch offices, field officers extend small loans, mostly ranging from Rs1,000 to Rs50,000, to poor women, who are allowed a year, or sometimes two, to repay. Indian commercial banks provide funds to microlenders to fulfil RBI regulatory requirements for socially oriented lending.

The Financial Times (UK) reports that Bandhan is now preparing to move from providing small, unsecured loans to poor rural borrowers to fully-fledged banking, taking deposits and offer bigger, longer-term secured loans. Once it receives its final clearances, the company plans to open the doors of 600 bank branches simultaneously, and start wooing deposits from well-to-do customers.

But over the next 18 months, Bandhan will lose access to much of the commercial bank credit it currently repackages into tiny microloans. It will instead have to rely on its own deposit base, or raise new equity, to extend credit.

Mr Ghosh says Bandhan, as a bank, will focus on customers excluded from mainstream banking. Bandhan will provide loans to buy affordable housing – where the sums are too small to interest mainstream banks – and provide capital for informal industries that many lenders avoid.

“My vision is to reach the people who are not reached by any other bank,” he says. “Traditional banks assess their banks by balance sheets. I assess my organisation by the number of customers. By 2020, I would like to serve 20m families.”

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