How prepared is Bandhan for a banking foray?
Bandhan is present across 18 states, with a client base of 4.6 million borrowers. We have outstanding loans of Rs 4,500 crore, which makes Bandhan the largest MFI in India. About 80 per cent of our operations are in rural areas, with 45 per cent in unbanked areas. Our capital base of Rs 1,000 crore is much higher than the regulatory requirement. All this makes us a good candidate for a banking licence.
What is the rationale behind the intention to convert into a bank?
In 2010-11, the same year the MFI industry suffered the worst crisis ever, then finance minister Pranab Mukherjee had announced the government was considering giving new bank licences. As an institution, we were already reaching the unbanked population, with a client base of 2.3 million people. We thought it made sense for us to be present in the banking space— this would help us expand our operations, as well as reduce costs and interest rates. We would be able to offer all kinds of financial services such as deposits, insurance and remittance services. Without wasting time, we appointed Deloitte to prepare a blueprint for a banking foray.
What were Deloitte’s key recommendations?
The issue is how to develop a banking model, keeping in mind our core activities. We wouldn’t dilute our reach in unbanked and rural areas. As a bank, we would have two wings—an MFI and a banking wing. The banking wing would look after corporate and non-MFI retail clients. We would continue with doorstep banking services. About 60 per cent of our lending would always be towards the priority sector.
For banking services, what is the investment required in infrastructure?
We need to upgrade both physical and information technology infrastructure (IT). For physical infrastructure, we need to adopt standard banking norms such as adequate security, ATMs (automated teller machines), etc. As far as the IT part is concerned, all our branches are computerised. There are areas where our representatives carry out doorstep banking but there is no internet connection. Once we migrate to a CBS (core banking solution) platform, all those issues would be sorted. Also, most of the software used in banking services is outsourced; so, the investment in IT is not huge.
If Bandhan converts into a bank, what will be the impact of interest rates?
At present, our interest rate is close to 23%. Banking licence will help us reduce interest rate by 10%, as we will not have to depend upon banks for funds. At present, 13-14% of our costs are due to cost of borrowing from banks.
As an MFI, delinquencies are as lower than 1% for you. But as a bank, your NPA might shoot up. How do you intend to keep your NPAs at low level?
MFIs have low NPAs, because we keep interacting with our borrowers on a weekly basis. As a bank, we will like to keep in constant touch with our borrowers, be it retail or corporate client, to check bad loans.
Will you induct a new management team if you convert into a bank?
Yes, we will have to induct new management at top level. Our existing stakeholders, including IFC, is providing full support for capacity building and other services for transforming into a bank.