The CMD of Bandhan shares details about the new bank's network, people and likely structure in an interview
Mumbai: Kolkata-based Bandhan Financial Services Pvt. Ltd is one of two companies (IDFC Ltd is the other) preparing to convert themselves into banks, having received an ‘in-principle’ approval from the Reserve Bank of India (RBI) six months back. In an interview on 1 October, chairman and managing director and the face of Bandhan, Chandra Shekhar Ghosh, shared details about the new bank’s network, people and likely structure. Edited excerpts:
Are the preparations on schedule?
We are on track to open branches before next October. We have selected 30 people from our internal team and divided them into 12 different work stations each for products, branches, infrastructure, IT (information technology) and legal. These two- or three-member teams are in charge of the transformation. Deloitte (Touche Tohmatsu India Pvt. Ltd) is advising us and 15 of their people are also working with us to look at the regulatory, infrastructure and products and services requirements.
How is Deloitte helping you?
Bandhan is a micro-finance institution. We do not have the experience of a bank, though we have recruited people from banks who have been working with us for two-three years, so they (Deloitte) are helping with that. Also, for a bank we need to develop different policies, and they have the knowledge and skills to prepare the documentation.
What changes will you have to make to transition from a micro-finance institution to a bank, in terms of people, technology and infrastructure?
We are now not using a core banking solution so we have to select a vendor for that and also other software that is needed, like software for risk management, treasury and HR (human resources). We need a bunch of software to run a bank that is a process going on. Other legal processes are also going on to form the banking company and, as per RBI norms, forming a non-operative financial holding company (NOFHC).
How long will this legal process take? What about other things like branding?
This process has to be completed three months before the opening of the first branch but we are on track. Ogilvy and Mather is working on it. We hired them one month ago. Some big consultants are helping us like Pravir Vohra, formerly from ICICI, is helping us, and Kalyan Sundaram, formerly with Bank of India. We have a five-member team assessing technicalities. Amarchand and Mangaldas and Khaitan and Co. are helping us on the legal side.
How will your infrastructure change when the branches are opened? You have more than 2,000 micro-finance offices...
It will remain the same. We are catering to people who are unbanked and reaching to whom is hard as a bank because it is costly. All they need is a small amount and simple service. We are providing them credit services now at their doorsteps. We would like to continue these doorstep services. As a bank we are eligible to provide deposit services, insurance and remittance services and also pension services at the doorstep. We have a universal licence, which means we are not restricted to serve only these customers, we can also serve the middle class and high networth customers. We will set up nearly 600 bank branches to serve the other customers who are not our customers now. They are now getting services through banks, Internet and mobile; all channels used by the formal banking system, we will also offer.
How will your branch look compared with the look of your micro-finance office?
Our existing offices will remain where they are and we will start nearly 600 new bank branches around those same places. Our 2,000 offices will act like spokes and the new branches will be hubs. The bank will also do the microfinance service.
But this will require a lot of investment.
We have nearly ₹ 1,300 crore capital, we have received ₹ 160 crore from IFC (International Finance Corp.) as Tier II capital and just last week, taken ₹ 60 crore by selling NCDs (non-convertible debentures) maturing in two years to Oikocredit International (a Europe-based financial organization)—so the money is coming. We need ₹ 500 crore to start the bank. When we close the year, our capital could rise to may be ₹ 1,500 crore because profits will also be added to that. So capital will not be an issue.
How much money will you need to open branches?
We already have existing operations (which are giving) returns. We will have no issue to spend extra money. We have a business plan which we cannot share because our plans are changing depending on what each department finalizes.
Will you retain all 13,000 employees? How many do you plan to add?
Yes, we will retain all employees. We have recruited some senior people. We have hired about 200 people from our side, we are mostly training our internal people. We have eight training centres and 41 trainers, 10 of whom are ex-bankers like a former SBI (State Bank of India) training centre head Uttara Dasgupta who has designed the module for the training. Every month we are training 1,500 people.
One challenge is to convince people to keep deposits with you. How will you manage?
In the last 10 years, at the ground level we have developed a brand image, we don’t advertise. We meet every customer physically 50 times a year and that has helped us to gain customer trust and they have been asking us why not we take their deposits. Instead of giving their money to groups like Saradha (they can come to us). Market has the money but people are not finding the right institution where they can keep money. Bandhan is not new in the mind of those people but new in front of the middle class and high networth.
But why will people who have access to other banks keep money with you?
Even villages have middle class and rich people which do not have access to banking services. I would like to attract their attention, that’s good enough. The villages will continue to be the base from which we will expand. Bandhan will offer rates at par with others but from Bandhan you will earn much more that interest, you will get the gratification that your money will be used for the development of the poor. Bandhan’s NPA (non-performing assets) is 7 basis points on a 90 day accrual basis, so we know how to keep the quality of assets.
So no branches in cities? Where will the 600 branches be based?
All in the same areas (where we have a presence) including urban areas—Nagpur, Kolkata or even Mumbai—60% of our branches will be rural. When we become a bank, we will be in 27 states, up from 22 now. We will add the south Indian states—Tamil Nadu, Karnataka, Andhra Pradesh and Kerala. We will have 50-60 branches in cities. We have a micro-finance presence in Mumbai and we need branches to serve customers here.
There is a lot of speculation about new investors coming into your bank. RBI norms say that a single investor cannot hold more than 5%. IFC and Sidbi (Small Industries Development Bank of India) are already shareholders, do you need more investors?
These norms are for when we become a bank. We have to be listed within three years and we have time till then.
But won’t the existing investors need to reduce their stake? What is the shareholding now?
IFC has 11%, Sidbi 10%, employees 20% and two trusts nearly own 55%—2% is held by senior management staff. I own less than 2%. We don’t think we need to dilute stake right now. Dilution will come only during the IPO (initial public offering), only after three years after we start.
The promoter stake also has to come down. In this case, the promoters are also the two trusts?
We cannot say that now. We need some time on that. The process is on.
But many investors would have spoken to you for a stake...
Three years later, I am going for an IPO. So I cannot refuse any meeting with any investor. I cannot close my window. I meet them. They also want to know more about Bandhan and our model, I am sharing with you, why not with them? It is normal to meet investors but I cannot share any names.
Will IFC and SIDBI dilute their stakes?
No, they are not diluting. They would like to increase it. I told you about the ₹ 160 crore Tier II from IFC for seven years. Their intention is to give more, but we will like to wait till the last quarter after all our processes are completed to decide whether we need more money.
But don’t RBI norms say one entity cannot own more than 5% stake?
You are confusing between a bank and a NOFHC. As far as a NOFHC is concerned, the 5% restriction is not applicable to it. Bandhan Financial Services will create the bank through a NOFHC, in accordance with RBI’s licensing norms. When we list the bank through an IPO (this has to be done within three years after the bank becomes operational), there will be new shareholders in the bank and the cap on equity holding will be applicable to them.
Your lending rate, currently at 22% on average, will also have to come down.
Rate is not the issue, rather we have to create a financially viable model. On the basis of that, I will attract deposits, give loans and even I will survive. We have to find a balance on the basis of that, whatever interest rate we make. I am now taking money from banks and giving to my customers. Later I can directly take deposits which will automatically reduce my cost of funds which we can pass on to our borrowers.
Tamal Bandyopadhyay, consulting editor at Mint, is also adviser to Bandhan Financial Services Pvt. Ltd.