Mumbai: India’s fourth largest microfinance institution (MFI) by assets, Bandhan Financial Services Pvt. Ltd, is planning to be banker to smaller microfinanciers, a first-of-its-kind move.
The idea, said Bandhan chairman and managing director Chandra Shekhar Ghosh, is to help smaller microfinance firms survive in a competitive world. There are around 800 MFIs in India and only the top few manage to get low-cost loans from banks and development finance institutions such as Small Industries Development Board of India, (Sidbi).
Local focus: Bandhan chairman Chandra Shekhar Ghosh. IndraRanil Bhoumik/Mint
“Of course we will take a risk premium over our cost of funds and keep a margin, but it is not another business opportunity that we are exploring... It is just a helping hand to the smaller players who will have to pack up if they are not helped financially,” said Ghosh.
The cost of funds for Bandhan is typically around 11%, depending on the lending rate of banks. Ghosh proposes to add 1-2% as risk margin and a few percentage points as profit before lending it to the smaller firms.
“We cannot reach out to every village and it is only logical that chance should be given to the local players there,” said Ghosh.
Bandhan is present in 17 Indian states through 1,550 branches and 8,798 staffers. It catered to 3.2 million customers with an outstanding loan book of Rs.1,970 crore in September, as per the company’s website.
Bankers say they cannot lend to smaller microfinance institutions as readily as they do to bigger institutions.
“The main concern is that the initial capital of these firms is very small and they are not able to get decent risk ratings,” said a senior public sector bank executive who did not want to be named.
Even private equity funds who are big investors in MFIs seem to prefer bigger companies.
“This is a scale game and geographical reach matters. The opportunity has changed and we would prefer to invest in bigger MFIs that have such scale of operations,” said Paresh Patel, chief executive officer at Sandstone Capital Llc, a private equity fund that invests in microfinance companies.
The survival of smaller firms has come into question after the finance ministry asked banks to ensure that MFIs keep their lending rates under check.
While bankers said the final rate of interest should be left to MFIs, MFIs are finding it difficult to keep their interest rates low as their operating expenditure is high. They have also come under criticism for their lack of transparency on loan rates and Sidbi has initiated steps to make them more accountable on their rate of interest.
“Transparency is the main issue. The government of India and the Reserve Bank of India (RBI) have been stressing on the importance of sensitizing customers about the effective interest rate being paid by them. Not many know this at present,” said P.K. Saha, chief general manager of Sidbi, at a recent MFI conference.
Saha said that Sidbi, in association with the World Bank, was working out a common information platform for MFIs, where information can be shared to avoid multiple lending.
“We are in the process of finalizing code of conduct assessment tool. This tool will assess how much MFIs adhere to their code of conduct,” Saha said.
Bankers are sceptical about Bandhan’s initiative.
“Money given to them for lending to the weaker sections should go to the weaker sections and not to others,” said the banker quoted above. “They cannot use the loans taken from us for some other purpose.”
“However, if they are giving the money from their own capital after setting aside enough to meet their capital adequacy, that is their issue... I am not sure if RBI prohibits any such practice,” said the banker.
MFIs are categorized as non-banking financial companies, or NBFCs, and there is no restriction on such NBFC lending to another. As per RBI guidelines, all NBFCs have to maintain a capital adequacy ratio of 15%. This means for every Rs.100 disbursed, they have to set aside Rs.15 as capital.
Bandhan’s Ghosh is clear that the money will be lent through its reserves and capital only and they will not touch bank loans to on-lend to other MFIs.
A banking analyst from a domestic brokerage said this is a novel initiative, but may face regulatory hurdles as this is not what MFIs have been formed for.
The success of the initial public offer of SKS Microfinance Ltd, India’s largest MFI, has changed the industry scenario dramatically. Two more prominent microfinance firms —Share Microfin Ltd and Spandana Sphoorty Financial Ltd—want to list on the bourses.
Hyderabad-based Share Microfin is merging with another MFI, Asmitha Microfin Ltd, to build size and scale ahead of its public issue.
MFIs charge an interest rate of 24-36% while banks give them money at 10-13%, depending on their ratings.