Banking's new frontier

Bandhan Bank's tasks and opportunities

Bandhan Bank was the first of the two recent banking licensees to commence operations, with an inauguration ceremony on August 23. Its progenitor was Bandhan, a microfinance institution started by Chandra Shekhar Ghosh - who will continue as the CEO of the bank - in 2001 in Konnagar, a town close to Kolkata. It obviously did very well, setting up over 2,000 branches and lending to over six million customers. The bank itself will have around 501 branches. In the long history of Indian banking, this is the first time that an organisation will build its business model around the constituency that is now the focus of the financial inclusion agenda - small-ticket borrowers in agriculture, industry and trade. Since financial inclusion became a policy buzzword a few years ago, the approach to it has been largely top-down. Existing banks were asked to expand their lending activities to these borrower groups. They did so, but with a clear sense of obligation, because their organisational structure and incentive systems were simply not built to transform the mandate into a viable and legitimate business opportunity. Going back a little more in time, the relative lack of success of the regional rural banks also highlighted the importance of appropriate organisational and cost structures in achieving viability in these banking segments. The moment cadres and pay scales in these institutions were brought on a par with those in their commercial bank parents, the mission ended.

In fact, the whole process of issuing new bank licences had its roots in the assessment that incumbent banks simply could not achieve the inclusion objective meaningfully. Applicants for licences were asked to provide detailed business plans for inclusion. There is little doubt that, from the inclusion perspective, the organisational trajectory and business focus of Bandhan rendered it a deserving candidate. Its transformation from a microfinance institution to a bank will obviously be watched closely and its achievements as well as its travails will provide great lessons for both policymakers and other players in the banking sector.

Of course, it will have to deal with multiple challenges. Complying with prudential regulations and facing intense scrutiny from supervisors of the Reserve Bank of India will require significant investment in both accounting and control systems and human resources. As regards the competitive space into which the bank is entering, over the last several months, the Prime Minister's Jan Dhan Yojana has hugely increased banking penetration by opening new accounts. Many first-time account holders would presumably have been potential customers for Bandhan Bank; it will now have to persuade some of these people to open a second account with it. Further, the entry of payments banks will intensify competitive pressures in the very segment in which Bandhan has its roots. To survive and succeed, it will have to leverage the relationships that it has developed with farmers, entrepreneurs and traders to the fullest. These relationships are what will enable it to both grow its business and manage its asset quality. By the same token, as it expands outside its existing constituency, which it must, it will not have this asset to rely on. But, all concerns aside, it will be a pioneering institution in Indian banking and deserves collective congratulations and good wishes.

Disclosure: Kotak Mahindra and associates are significant shareholders in Business Standard Private Limited