Chandra Shekhar Ghosh is a man in a hurry since he beat India’s financial titans to win a prized banking license for his microfinance firm that lends to poor borrowers.
The founder of Bandhan Financial Services — Bandhan means “bonding” — must transform his microfinance company into a bank in just 18 months to serve India’s millions of “unbanked poor” under the license terms.
“For a microfinance company, getting a banking license is like achieving the Holy Grail,” Ghosh said in an interview.
India’s central bank created a stir last month when it handed one of its first banking licenses in a decade to the microfinancier based in Kolkata, bypassing heavyweight contenders such as billionaire Reliance Group chairman Anil Ambani.
The second license went to India’s biggest lender to road projects, IDFC.
Reserve Bank of India Governor Raghuram Rajan wants these new banks to penetrate poverty-hit rural areas to promote lending and saving among farmers, small businesses and others whom traditional banks have been reluctant to serve.
Just 35 percent of India’s adults have bank accounts, a rate the central bank calls “pathetic.”
Ghosh aims to open nearly 700 bank branches in 22 states and start with at least 10 million savings accounts.
Under the license conditions, one in four branches must be in towns with fewer than 10,000 people. However, Ghosh plans to go further, setting up 80 percent of his branches in rural areas, although there will also be “signature” branches in cities to raise Bandhan’s profile.
The 53-year-old has come a long way from working in his father’s candy store. Money was scarce at home when Ghosh was growing up, but he earned a master’s degree in statistics. He then worked for non-governmental organizations, where he saw close-up exploitation of the poor by moneylenders who charge up to 200 percent a year for loans.
Dismayed by the predatory loan sharks, he created a small lending outfit with 200,000 rupees (US$3,300) in capital and two employees in 2001. At first, he borrowed from friends to have funds to lend. However, he finally got his big break when the state-run Small Industries Development Bank of India put up capital — allowing him to expand his loan portfolio.
Bandhan slowly became India’s largest microfinancier, focusing on the northeast and then expanding across the country.
“I’m not an economist, I’m not a banker — I learn from my customers,” he said.
Ghosh recruited poor people to run his branches, declaring only they “understood poverty” and could identify the needy.
As Bandhan becomes a bank, Ghosh said some staff will need training to deal with more sophisticated financial products. Just three-fifths of his employees reached the final grade in school.
“Having a degree has never been the most important qualification for a job with us,” Ghosh said.
The beauty of becoming a bank means cheaper lending rates. Now, as a microfinancier, Bandhan must borrow from other financial institutions to make loans, which means its interest rates are as high as 22 percent annually. However, as a bank, Bandhan will have its own resources from depositors.
It is a “virtuous circle and means we’ll be able to lend at rates in the lower teens,” Ghosh said.
Ghosh will attempt to use Bandhan’s 5.2 million borrowers to build his savings account base. He already has a 57 billion-rupee loan portfolio and a staff of 12,961 working in his more than 2,100 microfinance branches.
“If we get two family members from our client base opening accounts, we’ll automatically have 10 million accounts,” said Ghosh, who promises the bank will “listen to people to meet people’s needs.”
However, Bandhan’s bank license is key for another reason — it signals redemption for India’s microfinance sector. Two years ago, alleged strong-arm debt recovery tactics by the then-biggest microfinancier, SKS, drove some farmers to suicide and brought the sector to the brink of collapse.
Microlenders have since been forced to significantly drop their lending rates thanks to strict new guidelines. The risk for Bandhan as it expands is that most of its borrowers are unsecured — they have no assets to pledge against their debt.
However, Bandhan already enjoys a top credit grading and a near zero default rate because under its current system an entire local community pledges to keep watch over one of its members who is borrowing.
Bandhan becoming a bank is “a huge achievement” for the industry, “which was thought to be in terminal decline,” said Alok Prasad, head of the Microfinance Institutions Network.
“Now [it] has steered its way out of troubled waters,” he said.
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