At a time when many microfinance companies are still reeling under pressure following the crisis in Andhra Pradesh about two years ago, Kolkata-based Bandhan Financial Services is planning to expand. The company plans to apply for a banking licence as and when the Reserve Bank of India comes out with the final guidelines on the subject. In an exclusive interview with Business Line , Bandhan’s founder and Chairman Chandra Shekhar Ghosh speaks about the company’s growth plans and the way forward for the industry.
Excerpts:
What were the key takeaways from the AP crisis? How is the industry coping with these challenges?
The crisis, which erupted sometime in 2010, has taught some important lessons. The issues of multiple lending and excessive borrowing came to the fore. It also forced MFIs (microfinance institutions) to take a peek into the code of conduct being followed by them. To overcome the problems of multiple lending and over-indebtedness, we are submitting client records to the credit bureau as mandated by RBI. Nearly 100 per cent of our records are now available with the two credit bureaus — Equifax and High Mark Credit Information Services Ltd. All MFIs now refer to the borrowers’ credit history before taking a lending decision.
This apart, a code of conduct has been deployed for the industry and is being actively monitored by the Microfinance Institutions Network (MFIN). As per the code of conduct, all MFIs have to ensure transparency in interest rates, processing fee and other terms and conditions pertaining to any credit extended. They are also mandated to provide these terms and conditions in vernacular language and are asked to keep an ethical behaviour towards their borrowers.
So do you think the crisis is behind us? What is the way forward?
If we can effectively monitor and put in place systems, then we will be able to address the key issues confronting the industry to a great extent.
The effect is already visible with banks showing willingness to lend to the sector. RBI’s guidelines bringing the MFI industry into its fold has increased the confidence level of bankers.
The central bank has also mandated banks to treat loans given to MFIs under priority-sector lending. So, bank credit has improved.
However, banks have become choosy and are “cherry-picking” while lending to the sector. I feel consolidation is the way forward for the industry, as small and mid-sized MFIs will find it difficult to get bank funding. Moreover, they will also find it difficult to sustain their operations with the 10 per cent margin cap suggested by RBI.
How do you see your business growing? How is the 10 per cent margin cap going to affect your profitability?
The crisis has had little impact on our operations. In fact, it helped us grow our business by over 50 per cent in 2011-12 to Rs 3,700 crore. This year, we expect to grow by about 20 per cent to Rs 4,400 crore. The slowdown in growth rate is on account of a higher base.
The 10 per cent cap on margins suggested by RBI will not affect our profitability, as our operation cost is one of the lowest in the industry at around 6-7 per cent. So even with a margin cap of 10 per cent, we earn a profit margin of about 2-3 per cent.
Our operation costs are lower because we have focused on low-cost model from the beginning, particularly on the infrastructure front. Moreover, our focus has been on growing our asset book steadily. A steady growth in loan book helps bring operational efficiency and costs appear lower on higher disbursals.
Are you planning to raise capital to fund your growth?
We are adequately capitalised at present. Our net worth as on September 30 was Rs 800 crore. Last year, International Finance Corporation had brought in equity investment worth Rs 135 crore. If required, we can raise further capital next year. This year, we have sanctioned bank funding worth Rs 2,550 crore, of which Rs 1,500 crore has already been disbursed, and the rest will come in shortly.
This apart, we are also planning to sell loans worth Rs 300 crore to banks through a securitisation deal in February next year. There is a good demand from banks for such deals, as this can help them meet their priority-sector target. Selling loans will release capital for us and will help us deploy fresh loans to the poor without borrowing directly from banks.
You are planning to apply for a banking licence. How do you see this adding to your business?
There are four dimensions to financial inclusion — savings, credit, insurance and remittance. Currently, through Bandhan we are catering only to the credit side. A banking licence will help us address the other three areas.
This apart, I am currently dependent on bank loans (45 per cent) for funding my business. Once I can garner my own deposits, my cost of funds will come down, which can be passed on to customers.
Moreover, to procure a banking licence, we are quite comfortably placed on the capital front. Nearly 85 per cent of our 1,700 branches are in rural areas where population is less than 2,000.