Bandhan signals competition for rural microfinance

According to MFIs operating in rural areas, private banks have been charging interest rates of 24-26 per cent on a reducing balance

One big implication of the grant of a banking licence to Bandhan Financial Services on the basis of its 13-year record in micro-lending to the poor and disadvantaged is the likely impact on the nascent market for deposits in rural areas.

In fact, spurred by like developments, at least two mainstream lenders operating in West Bengal (Bandhan is based in this state and accounts for nearly three-fourths of the micro finance market here) — YES Bank and HDFC Bank- have started ‘doorstep’ banking in rural areas for credit and deposit mobilisation. HDFC Bank has been employing own field staff; YES appears to have tied up with non-government organisations (NGOs). The two banks would not comment on the extent of their micro finance operations.

As private banks enter the business of thrift and credit in this segment, rural financial markets could be subject to competition like never before. Before getting his in-principle nod for a banking licence, Chandra Shekhar Ghosh, founder-head of Bandhan, had said there was scope to reduce lending rates by six to seven per cent if the organisation would be able to take deposits.

“Private banks are operating in the same model as micro finance institutions (MFIs) but the difference is that it is a kind of of de-escalation for them — going down the pyramid from up. In the case of Bandhan, it is already in the lower strata,” he said.

According to MFIs operating in the rural areas, private banks have been charging interest rates of 24-26 per cent on a reducing balance.

After the MFI crisis in Andhra Pradesh, banks had almost stopped lending to NGOs. As a result, a tie-up with a private bank for distribution of the latter’s products comes as a profitable option for them.

“Certainly, if we tie up with a private bank, our margin gets reduced by at least two per cent. However, banks have stopped lending to NGOs and the tie-up is a win-win situation for both the bank and the NGO,” said Animesh Naiya, chief executive officer, Dhosa Chandaneswar Bratyajana Samity, an NGO-MFI based in South 24 Parganas district.

At present, not many MFIs see the entry of private banks as an immediate threat. “The scale of operations (in this segment) of private banks is small. We will have to wait for the next few years to know the impact of new entrants,” says Shubhankar Sengupta, CEO of Arohan.

According to the website of YES Bank, its scheme, SAMPANN, is the first institutionally sponsored direct intervention model for micro finance in India.