On 12 December, Reserve Bank of India deputy governor Usha Thorat visited the Salt Lake, Kolkata, headquarters of Bandhan, the microfinance institution founded by Chandra Shekhar Ghosh.
Thorat is one of the highest ranking officers at India’s central bank that, like the country’s finance ministry which oversees it, believes in what is called “financial inclusion” or making financial products and services accessible to people who have hitherto had no access to them. At their meeting, Thorat commended Ghosh on Bandhan’s achievements; it is among the fastest growing microfinance institutions, or MFIs, in eastern India.
Funding the poor: Chandra Shekhar Ghosh, managing director of Bandhan, hopes to make the Kolkata-based microfinance institution a bank for the poor by 2020. (Photo: Indranil Bhoumik/ Mint)
Eight days later, US business magazine Forbes announced its inaugural listing of the world’s top 50 MFIs. ASA, from Bangladesh, long considered the birthplace of microfinance, came in at No.1. Bandhan was No.2. And Bangladeshi Nobel laureate Muhammad Yunus’ Grameen Bank was No.17.
Ghosh has a Bangladesh connection, too. He was born in Agartala, Tripura, in 1960 to an immigrant family of sweet-makers from Bangladesh. He went back in 1971, helping out at the family sweet shop, studying at Dhaka’s university, and working with BRAC, Bangladesh’s premier and oldest social service organization. But he was more impressed by ASA, one of Bangladesh’s most well-known MFIs founded in 1978.
So, when he launched Bandhan in 2002 after returning to India and working with several MFIs in Tripura and West Bengal, he adopted ASA’s model of “individual lending”. Bangladeshi MFIs operate in an easier policy regime, though. Eight out of 10 MFIs in that country accept savings from customers and sell them insurance, while Indian laws prohibit MFIs from serving as banks or insurance companies.
The right model
Microfinance, or the practice of lending small amounts of money to people who are typically not considered worthy of credit by banks and other large financial institutions, has been around in India for a few decades. However, it was only by the beginning of the century that it started to gain momentum, a period in which it has also come to occupy more thought space in developed countries, as is evident in Yunus’ 2006 Nobel Prize and Pierre Omidyar’s $100 million (Rs394 crore) gift in 2005 to the Tufts University to invest in microfinance companies. Omidyar, the founder of eBay Inc., has also been at the centre of a debate on effective microfinance models. He believes that microfinance companies have to depend on the market for funds and learn to be profitable. The other school of thought on microfinance says it is all right to depend on grants and gifts for funds and that profitability is a secondary objective.
The Forbes ranking was prepared by Microfinance Information Exchange (MIX), a portal that provides information on MFIs, from the audited 2006 results of 641 MFIs. They were ranked on four equally weighted parameters: scale, efficiency, portfolio risk and profitability. Bandhan scored well on risk, scale and efficiency; there are six other Indian MFIs on the list.
“A simple and transparent working style, very committed staff and members, and our partners—all these have helped us to achieve this distinction, I think,” says Ghosh, a lean, dark man who always uses the public transport. The simplicity behind Bandhan seems to have worked. In an industry where only 2% of MFIs in India serve more than 200,000 clients, Bandhan stands out with a client base of 842,779—all acquired in six years.
While MFIs generally depend on women to form groups, Bandhan lends exclusively to women.
And it charges a flat interest rate of 12.5% compared with an industry average of 24-25%. Interest rates on microfinance are high, when compared with, say, the rates at which banks lend to companies and middle-class customers in urban centres, but this is because of higher costs involved in accessing money from banks and other lenders to MFIs and, in turn, lending this to people with no credit history in urban slums and rural areas (banks and MFIs term this transaction costs).
However, even this 24% is insignificant compared with the 1% a day or 10% a month interest rates charged by local moneylenders from whom most poor people borrow.
Bandhan’s 12.5% isn’t just one of the lowest rates for loans without security, but is also on a par with what an urban homebuyer pays on a mortgage.
“Scaling up will allow us to drop rates even lower,” says Ghosh.
Bandhan’s main source of funds is loans, not grants. It started operations with a Rs20 lakh loan from the Kolkata branch of the Small Industries Development Bank of India. Thus far, Bandhan has disbursed a total of Rs440 crore, of which loans worth Rs258 crore are still “live”. The MFI’s customers have an admirable repayment rate of 99.99%; only Rs7 lakh worth of loans are overdue for more than four weeks.
According to Moumita Sen Sharma, vice-president and India head, microfinance, ABN Amro Bank NV, one of Bandhan’s earliest supporters, Ghosh “has a very efficient model”. Apart from the focus on women, the lower interest rates and the dependence on loans, Bandhan’s model is different from that of most Indian MFIs in one more way—it lends to individuals.
Most MFIs lend to five-member groups to form a centre that shares liability and default. That model, says Ghosh, often penalizes the entire group for even a single default, resulting in breaking the spirit of the group—not a desired objective, especially because such groups are formed among relatives or friends.
“The responsibility and thus accountability is higher in the case of individual lending,” Ghosh adds.
The typical Bandhan client lives around the poverty line, with a monthly income of Rs2,000-2,500, sometimes owning less than half an acre of land. The average size of loans is Rs3,500. Loans are taken to buy and ply a rickshaw, set up a small store or tea stall, sell vegetables, fish, cosmetics, sarees or buy poultry or cattle.
The mechanics of a loan from Bandhan are fairly simple. For instance, a Rs3,000 loan must be paid back in a year, in 45 equal weekly instalments with a maximum grace of seven weeks. The minimum loan is Rs2,500, while the average for urban educated clients is Rs7,500. Members have to maintain 15% of their outstanding as security deposit but because by law, MFIs are disallowed from accepting savings from the public, Bandhan pays out an incentive to its members at 5% a year. If a member dies, the outstanding amount is written off and the security goes to her nominee.
All loans are covered under an insurance scheme funded by a 2% charge on borrowers. And creditors are taught to read, write and sign their names upon enrolling.
For the very poor
According to a survey conducted last year by Bandhan, more than 90% of its customers used the loan to fund existing enterprises, which implies that working capital is the most pressing need for the poor. “The poor don’t need aid or help in kind. They want to earn a living. And nobody can develop or expand a business depending on a moneylender,” says Ghosh. Encouraged by the success of his microfinance initiative, Ghosh has embarked on a project to extend it to a segment he calls “hard-core poor”, beggars and other such people who aren’t eligible for even microfinance.
According to the 2007 State of the Sector report published by Microfinance India and Access Development Services, organizations that promote microfinancing, only 30% of the 37 million MFI clients are below the poverty line, or earn less than Rs500 per person per month. Bandhan has completed a year-long pilot programme for 25 destitute women near Kolkata during which the creditors have tripled their income. The programme will select 600 women, picked by their own communities, train them for two years and give them each assets such as tea stalls, sewing machines or cows. It will be mandatory for the women to save. In 2006, the programme won one of the five awards announced every year by the Consultative Group to Assist the Poor, a consortium of 33 public and private development agencies, under their Pro-Poor Innovation Challenge.
The pilot programme also attracted a Massachusetts Institute of Technology research study led by Prof. Abhijit Banerjee, one of the world’s best-known experts on poverty. The study, says Prof. Banerjee, “is an evaluation of the programme where the ultra-poor are given an asset and then followed over time to see whether the fresh start that this offers them will lead to a durable change in their well-being.” Bandhan wants to find out whether these people can graduate to being microcredit clients, he adds. “Bandhan is a great example of how the combination of vision, strong leadership, and bold goals can stimulate growth. This (the Forbes listing) is one of the most prestigious rankings in the industry to date,” Geoff Davis, president of Unitus, a Redmond, Washington-based microfinance investment and equity fund, that has partnered three of the Indian MFIs on the Forbes list, said in an email.
Sen Sharma of ABN Amro Bank agrees. “It (Bandhan) is the first MFI in the eastern region to have achieved a significant scale and rapid growth, even while maintaining asset quality and elegance of operations.”
Bandhan has an mfR4 rating from rating firm Crisil Ltd (mf stands for microfinance; R1 is highest rating and R8 the lowest), reflecting its “good net profitability margin, well-experienced board and advisory committee, and consistent good asset quality” and constraints of “low capital adequacy ratio, increasing cost of borrowings, and the regulatory and financial risks associated with microfinance operations”. The recognition has made Ghosh to think big: he has set Bandhan a goal of serving 2.5 million by 2010. Ghosh, who once waited for funds from banks which could sometimes never show up, says now, “banks wait for” him. “By 2020, we hope to become the Bandhan Bank for the Poor.”
Forbes ranking of MFIs in India questioned
Even though India has seven MFIs on the ‘Forbes’ list, some experts have questioned both the ranking and the methodology behind it. Sanjay Sinha, managing director of Micro-Credit Ratings International Ltd (M-Cril), a microfinance rating agency, says he was “surprised that the two largest Indian MFIs, Spandana Charity Trust and Share Microfin Ltd, find no mention, while SKS is ranked at a low 44,” in the ‘Forbes’ list. He adds that “ Basix, a beacon of best practice and innovator in livelihoods promotion, is omitted.”
Curiously, even in MIX’s own list for 2007 (the portal has its own ranking of the top 100 microfinance institutions), Bandhan is ranked at No. 6 while ASA is at 13. The MIX list is overwhelmingly guided by outreach, where India scores owing to its large number of poor people.
Sinha also questions the authenticity of self-reported data, especially when it concerns portfolio quality (an indicator of risk) and efficiency. And he says using the size of the portfolio as a parameter isn’t a good idea because it looks merely at an aggregate number and not the average loan size.
Explaining the ranking, Peter Wall, executive director of MIX, says “66% of the financial data reported on MIX Market—and 90% for leading MFIs—are verified by MIX against audit or rating reports. Also, we work with leading MFIs familiar with international reporting standards”. Wall adds that using the portfolio or asset size as an indicator was dictated by “‘Forbes’ whose primary consideration was its target readership”.