BANDHAN CASE STUDY

PREPARED BY :

Bakshi Satpreet Singh (10MBI1005)

1. Why are MFIs required? Highlight the

special role of MFIs in developing

economies?

MFIs are required because these organizations provide hard-to-

find financial services to local individuals and groups. MFIs aim

to promote economic activity among low-income earners, for

whom access to official banking services is impossible or nearly

so.

An MFI's reach can vary tremendously. One institution could

serve a hundred clients while another MFI, such as Grameen

Bank or Bandhan, could serve six million.

The special role of MFIs in developing economies are :

- Create sustainable activity to increase their income .

- Reduce external Shocks

- Improve living condition of entrepreneurs and their family.

- Empower people and mainly woman

2. How has Bandhan achieved its

scale since its inception?

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Bandhan primarily lends to women who organize themselves in groups of between 10 and 20 members.

The loan is given to the individual members. The group acts as a control mechanism which ensures that members do not make willful defaults.

Bandhan as a banking entity would be access to low-cost current and savings account deposits at five to six per cent, which will reduce its cost of funds and help scale up lending to poor.

Bandhan borrows from banks at interest rates as high as 18 per cent, which means it charges 20 to 25 per cent per annum from small borrowers.

Bandhan had distinct functional business units with clearly demarcated roles and responsibilities to look after its operational needs

Entire model is based on ‘simplicity’ and ‘customer centricity . “A borrower does not come just for a lower interest rate, they come for the relationship.”

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Bandhan followed a group-based approach for extending

financial services. The loans provided to Do Not Cop customers

were unsecured loans and were not backed by any collateral.

Therefore, the involvement of a co-borrower reduced the risk

for Bandhan because the co-borrower put peer pressure on the

borrower, which encouraged them to pay on time. The loans

were repaid on a weekly, fortnightly or monthly basis.

3. What are the factors constraining Bandhan and the scope of Bandhan to remain viable as a NBFC-MFI? Evaluate these with consideration of the crises in the MFI ?

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Excessive reliance on West Bengal (now 49.12%) in the portfolio and hence issues with dealing with diverse socio-economic, agro climatic and linguistic environment as Bandhan sees rapid expansion .

Excessive hierarchy in the system

Housing system of Bandhan : That means Bandhan must discover the trade-off and dynamically adjust its “trusted” policy in a changed context

Apparently increasing transaction and transformation cost of the organization with increased complexity of the regulatory system.

A relatively isolated R & D system

Relatively new exposure to Information Technology which would be a backbone in maintaining a national profile.

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Market space opening for credit plus services like health,

education etc.

Strong brand image reinforcement in the times of financial

crisis

Can rewrite the agricultural loans as priority sector lending

portfolio to commercial banks (Bandhan has a strong experience

in that sector)

International markets for MFI based on the Indian experience

and reputation which Bandhan has acquired : The apparent

success of Bandhan in Eastern and North Eastern part and the

opportunity to prove the same across the entire country, would

be vital in setting up an international platform.

4. Should Bandhan transform into a Bank?

What are the implications of this for its

vision. Mission and the organization?

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Yes , Bandhan should transform into a bank because

Strong experience in maintaining customer relationships and

loyalty .

Presence of Research Expertise

Experience across the value chain of financial products .

Range of partnerships across multiple banks (37 as on 31-03-

2013); indicates strong financial backbone and diverse

partnerships .

Strong organizational ethics and respect for the client

.Recognition by independent agencies .

Bandhan has a history of providing value adding services .

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The transition to a bank, however, is not going to be easy. Banks have mandatory obligations - there is priority-sector lending, there is the requirement of rural branches, there is statutory liquidity ratio (SLR) and cash reserve ratio (CRR) to be maintained which basically means leaving assets idle.

So they will have to set aside 23 per cent of its funds as standing liquidity ratio.

Bandhan set up in April 2001, has been helping relatively poorpeople in areas of the country where banks hardly exist, with bulk ofthe loans ranging from a minimum of Rs1,000-Rs50,000 invested insmall businesses such as tailoring, fish and vegetable selling, runningsmall provision stores and so forth.

When you work in rural areas, trust matters the most. Over 13years, we have built a great reputation and brand. It's our strength andwe will use it to its full potential. At present, we are also developing amechanism to gauge which customer we need to cater to and whetherwe have to service them at their doorsteps or bring them to the bank

Bandhan is expected to rely on government-backed CreditGuarantee Fund Trust for Micro and Small Enterprises to cover therisk in the unsecured lending portfolio in this segment

5. Is Bandhan ready to be a bank? What

challenges do you envisage Bandhan would

face during such a transformation? How

Bandhan can overcome them?

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Yes , Bandhan ready to be a bank .

Bandhan field staff members were trained in microcredit

activities but lacked the experience of savings mobilization.

challenge was in converting them to “barefoot bankers.” Also,

the integration of the existing field staff with highly skilled bank

branch employees was likely to be a tough task.

Bandhan operated in remote locations, with 80 per cent of

its operations in rural areas and 45 per cent in unbanked

areas. 36 Rural India still happened to be largely under-

connected and suffered huge power shortages. Giving

Bandhan’s business an online capability could be a

challenge.

Bandhan currently working in an offline mode, data

transfer and migration to the core banking system (CBS)

would be a challenging task.

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Bandhan can overcome by following :

Better Training facility for employees

Outsourcing : Save cost.

Go for fresh recruits , hire from campus .

IT services help

6. What should be the transformation plan for

Bandhan to get converted to a bank?

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Start off with 600 branches.

The 58 lakh existing micro-finance customers will be transferred from the micro-finance outfit to the new bank and all of its customers would be provided with banking infrastructure.

Focus will be on financial inclusion. They will continue to service existing customers. In addition, they will be able to reach more micro-credit customers.

To use SMS tech for rural banking.

The bank will diversify operations to include a range of products such as savings, remittances and payments, with a focus on the under-banked, according to IFC’s project disclosure.

Combined equity commitment of Rs 1,600 crore (Rs 16 billion) from International Finance Corp (IFC) and GIC, Singapore’s sovereign wealth fund.

The proposed investment is aimed at supporting the transformation of Bandhan to a universal bank, focused on low-income households.