Microfinance 2.0

From sweet shop to corner suite

Shekhar Ghosh, named India’s Entrepreneur of the Year last year by The Economic Times, just bested moguls like Anil Ambani of Reliance Capital and the Aditya Birla Group in winning one of only two bank licenses recently awarded by the Reserve Bank of India.

Ghosh’s firm, Bandhan Financial Services, is India’s largest microlender.  It has $1.6 billion in small, unsecured, outstanding loans to poor, industrious Indian women with terms of one to two years.  The loans range in size from Rs1,000 to Rs50,000 ($16-800).  Bandhan’s loan recovery rate has been 100%. 

With its new license, Bandhan plans to transform itself from a middleman into a principal.  In the past, Bandhan has obtained as much as 80% of its funding from Indian commercial banks who provided the capital to satisfy their regulatory requirement for socially-oriented investing.  Bandhan then on-lent those borrowed funds to a current total of 6.3 million women entrepreneurs.  Starting now, Bandhan will be giving that capital back to the big banks and taking deposits directly from its own customers, turning itself into a full-fledged commercial bank, extending larger, longer-term, secured credit to a wider pool of Indian businesses.   

This January, the IFC and Singapore’s sovereign wealth fund (GIC) invested an additional $258 million in Bandhan which brought the company’s capital base to almost $500 million, more than enough to qualify for an RBI banking license.

Ghosh, 54, formed Bandhan as an NGO in 2001.  Eight years later, he registered Bandhan as a for-profit, non-banking finance company and procured capital investments from the Small Industries Development Bank of India and the International Finance Corporation of the World Bank.  This January, the IFC and Singapore’s sovereign wealth fund (GIC) invested an additional $258 million in Bandhan which brought the company’s capital base to almost $500 million, more than enough to qualify for an RBI banking license.

Bandhan (which means “bonds” or “ties” in Bengali) currently has 2,000 branch offices and 16,000 field officers throughout India.  Bandhan plans to open 600 new branches, solicit deposits from wealthy Indians and raise new equity to replace the large commercial banks on which it has been relying for funding.  The RBI banking license also requires Bandhan to list on the Bombay Stock Exchange by 2018. 

Attracting deposits should enable Bandhan to pay less for its funding and lower its current interest rate of 22.4% for small borrowers.  Deposit-based funding of larger, longer-dated loans, however, will increase Bandhan’s operating costs by requiring it to develop new banking capabilities such as assessing credit risk and maintaining ATMs around the country.

To that end, Bandhan has retained Deloitte as an adviser and hired 400 new employees with commercial and retail banking experience who are now training all of Bandhan’s employees in banking systems.

Ghosh came to Kolkata from Bangladesh in 1971.  His family were refugees from its break-up with Pakistan.  Ghosh worked in his father’s sweet shop before earning a master’s degree in statistics at Dhaka University after which he joined an NGO in Bangladesh called BRAC which inspired his interest in microfinance.  He returned to Kolkata in 1997 to prove that microfinance could work in India where poor borrowers were being charged as much as 700% interest by local moneylenders.  After failing to persuade any Kolkata-based NGO to take up microfinance, Ghosh put up his entire life savings of Rs200,000 ($3,200) to launch Bandhan.   

Bandhan will continue to focus on customers excluded from mainstream banking such as those seeking affordable housing or capital for cottage industries.  “While traditional banks assess their [success] by balance sheets,” Ghosh says, “I assess my organization by the number of customers.  By 2020, I would like to serve 20 million families.”