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Bandhan Bank: From Microfinance to Commercial Banking

microfinance in west bengal

Bandhan Bank has been setup by Bandhan – India’s largest microfinance and financial service company headquartered in Kolkata, West Bengal. It started out as a micro-finance company in 2001 and delivered financial services through Bandhan Financial Services Pvt Ltd. (BFSPL), incorporated under the Companies Act, 1956. Bandhan Micro- Finance has expertise in lending money to low-income women entrepreneurs, Self Help Groups (SHGs) and small-scale businesses and is a pioneer in it.

Its emergence as a bank happens at a time when the Indian banking industry is experiencing a steep rise in non-performing assets (NPA). This rise over the past few years, primarily of the public sector banks (PSBs) is a matter of concern. Overall the NPAs or bad loans, including private sector lenders, increased from 2.43% in 2012 to 4.04% at present. The gross NPA of the PSBs alone is even worse, rising from 2.77% in 2012 to 5.08% in 2015. The rising NPAs have set alarm bells ringing all across. At this juncture, when banks are thinking of various strategies to reduce bad loans, Bandhan, which has been successful in keeping its recovery at a unmatched rate of more than 99.5%, makes a foray into the banking industry. In 2014–15, its bad assets were only 0.1% of the loan book.

How Bandhan has operated so far: Bandhan provides loans to only female borrowers. A borrower who applies for a loan from Bandhan submits a detailed micro plan of the project along with the cash flow to the bank. A loan is sanctioned only when the bank authorities feel that the project is viable. Once a loan has been sanctioned, bank officials visit the project after 15 days from the day the loan is sanctioned to monitor whether it is being properly utilized. Bandhan delivers loans through the model of individual liability through group formation. An individual borrower has to be part of a group to obtain a loan from the bank though she is individually liable for the loan. Individuals make repayments weekly at public meetings, which are held at one of the group member’s house. A loan officer from Bandhan leads these meetings. Members are persuaded, if not required, to attend these meetings and most of them comply unless there is some medical or other perceptible emergency. The weekly repayments start immediately after a week of the loan receipt.

In order to operate with all this monitoring Bandhan charges an interest rate

of 22.4% yearly and the borrowers don’t mind high rates because of easy availability of loan without the need of giving any collateral.

When an individual is about to default on her weekly payment the group dynamics come into play and the group members help in timely payment of the loan. They value repaying on time to Bandhan to such an extent though there is no “late fee” associated with delayed repayment. A possible reason could be that they consider Bandhan as the main potential source of credit available to them and recognise that their access to future loans would be compromised if they defaulted on loan repayment or were sufficiently delinquent.

Transition from Microfinance to Bank: Bandhan was set up in 2001 to address the dual objective of poverty alleviation and women empowerment. It started with a staff of 3 and 1 branch office in Howrah district in the state of West Bengal. In 2014, Bandhan received a banking license from RBI and on 23 rd August 2015 the bank was officially inaugurated in Kolkata by the Finance Minister of India, Mr. Arun Jaitley. Bandhan Bank has started with a capital of Rs 2,570 crore. It has 1.43 crore accounts, a loan book of around Rs 10,500 crore and 19,500 employees. The integration of Bandhan’s microfinance business with the banking one will take place through creation of two verticals at each branch, with one level for the microfinance and other for retail banking operations in India. It is the first bank to be born in Eastern India post-independence.

Future Plans: It plans to have 34% Collateral Adequacy, 632 branches and 250 ATMs in 27 states by the end of fiscal year 2016. Over 71 percent of the branches of the bank will be in rural India, including 35 percent in unbanked rural pockets. Bandhan Bank will primarily cater to the unorganized sector like daily wage earners and women running small businesses — the segments that had been its borrowers for a decade. As a bank, it will also offer savings, remittance and insurance services and try to raise its stake in the bottom of the pyramid customers even as the established ones such as State Bank of India and ICICI Bank are in a race to have more customers from the unbanked population. It will be the first bank to give the facility of Human Teller Machines in Urban Areas and Metros.

Category: Payday loans

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