The Growing 'Bandhan' Of Microfinance

The initial public offer (IPO) of the Bandhan Bank was the talk of Dalal Street last month. The Rs 4473 crore IPO was oversubscribed 14.6 times. Following the strong investor response to the issue, the bank made a blockbluster debut on the bourses, getting listed at a premium of about 30 per cent over its issue price. Read on to find out the prospects of the bank going forward. 

Company Background 

Bandhan Bank Limited (BBL) is a commercial bank focusing on serving under-banked and under-penetrated markets in India, which is a high-yield business (NIM of 10.7 per cent for 9MFY18) and which also enjoys the priority sector lending (PSL) benefits. 

The bank began in 2001 as an NGO named Bandhan Konnagar with the purpose of providing microfinance services to socially and economically underprivileged women in rural part of West Bengal. Over the years, the BBL has transformed itself from an NGO to an NBFC and now to a bank. BBL launched its banking business in the second quarter of FY16 with a greenfield network of 501 bank branches and 50 automated teller machines (ATMs), which it has now expanded to 887 bank branches and 430 ATMs in Q3FY18, serving a general banking customer base of over 2.13 million. The bank majorly operates in eastern and north-eastern parts of India with West Bengal and Assam contributing major operations of the bank. 

The bank has a very healthy business mix. On the asset side, the retail loans comprise micro loans, SMEs and small enterprise loans. The bank's 96.5 per cent of the gross advances are PSL compliant. On the liabilities side, as of Dec 17, the bank had a deposit base of Rs 252.9 billion, of which 33.2 per cent was CASA and 85.01 per cent deposits were retail in nature. Also, as of Dec 17, the bank had advances of Rs 243.6 billion, gross and net NPA of 1.67 per cent per cent and 0.8 per cent, respectively, and high return ratios of 25.6 per cent (RoE) and 4.1 per cent (RoA). Prior to demonetisation, the bank’s NPAs had never gone beyond 0.5 per cent 

Low cost and extensive distribution network 

BBL’s distribution network is relatively low cost, which is a result of ‘hub and spoke’ model of using DSCs and bank branches, as well as focusing on tech initiatives. BBL has strategically located DSCs in close proximity to micro loan customers to provide them customised services in a timely manner. Around four to six DSCs are linked to a single bank branch. The bank staffs its DSCs with six to seven employees and equips the DSCs with handheld devices connected to the core banking system. Because of the relatively low staff strength and the fact that it does not need full-scale IT systems, DSCs provide a cost-effective means of extending the branch network. 

Being a bank, BBL is able to source funds at lower costs (through deposits) compared to other microfinance players. This gives BBL an advantage over other MFIs as BBL can price its loans lower than other MFIs without sacrificing any spread. A combination of these factors allows BBL to generate high RoE. 

Under-penetration of credit and banking services in India 

Although rural India contributes 47 per cent of India's GDP, its share in total credit outstanding is only 10 per cent, vis-à-vis 90 per cent for urban India (as of FY16). This extreme divergence in the share of rural areas in India’s GDP and banking credit is an indicator of the very low penetration of banking in rural areas.

Lower share of northern and eastern regions in total bank credit and deposits Indian banking credit and deposits are predominantly concentrated in the southern and western regions, whereas banking credit and deposit penetration have been empirically low in the northern and eastern regions. Banking retail credit per capita in the eastern region is the lowest, and is five times lower than the southern region. Low per capita retail credit in eastern, central and north-eastern regions shows the low penetration of banks in these regions compared with other parts of the country. This provides an opportunity for the bank to further penetrate these regions and expand its reach in specific areas within them. 

Microcredit sector 

The gross loan portfolio (GLP) of MFIs grew at 51 per cent CAGR from FY13 to FY17. This growth was fuelled largely by the growth in GLP of various large players, such as Janalakshmi Micro finance, Bharat Financial Inclusion, Ujjivan Financial Services, among others. There are many unorganised moneylenders in the domestic microfinance industry. Hence, there is large scope for MFIs to grow their portfolio by covering areas that are least penetrated and where there is predominance of unorganised players. 

Enhancing digital platform 

BBL has established internet banking facilities, a mobile banking app, online and mobile payment modes for cashless payments, e-commerce payments through 'Verified by Visa' and Rupay Pay Secure, and other online payment and other services. The bank is also implementing online investment options to allow customers to invest in mutual funds and buy shares in initial public offerings. BBL has also adopted payment systems such as the Unified Payment Interface, the Bharat QR Code and the Aadhaar-Enabled Payment System, in addition to online KYC and other services. Such digital and technology platforms are expected to reduce operating costs, risks, errors and help the bank operate with greater cohesiveness and efficiency. 

Customer-Centric Approach 

The bank designs customer-centric products such as offering educational micro loans and healthcare micro loans. On the liability side, BBL offers products such as variety of daily deposits, recurring deposits, and other services. In addition, the bank provides financial education and borrower's training to certain groups of current and potential customers, helping them increase their financial literacy and willingness to take micro loans. 

To boost share of non-interest income BBL is planning to complement its interest income with non-interest income from other sources to diversify its income stream and improve margins. Besides selling PSLCs to non-PSL compliant banks, BBL plans to generate fee income through distribution of third-party insurance and mutual funds. The bank also plans to commence distribution of life insurance products as corporate agent for which it has received a licence from the IRDAI. The bank has commenced remittance services as well, which will provide a stream of noninterest income. 

Comparative analysis of the evolution of new private banks since inception Bandhan Bank was the only player to begin operations with over 500 branches. Most of its branches are micro branches catering mainly to retail customers. With its strong retail presence and high number of branches, BBL’s CASA ratio was approximately 28.18 per cent in its second year of operation, which was well above many other new private banks during their initial stages. 

Associated Risks 

A considerable portion of BBL’s operations are located in East and North-East India, which makes it vulnerable to risks associated with having geographically concentrated operations. Also, BBL handles cash in a high volume of transactions occurring through a dispersed network of its branches and DSCs. Hence, it is exposed to operational risks, including fraud, petty theft, etc., which could harm its operations and financial position. Further, Bandhan Bank’s operations involve transactions with relatively high risk borrowers (unsecured loans). In the event of non-payment by a borrower, BBL may be unable to collect the unpaid balance which could adversely affect the business, operational results and financial condition. 

Conclusion 

Being a bank, BBL was able to ride the recent MFI crisis smoothly unlike NBFCs and MFIs. So, in the current form, BBL is a robust and resilient micro loan financier with great growth prospects. Further, the bank is expected to benefit largely from financialisation of household investments, especially in the rural and under-banked areas; the experienced and professional team backed by a strong independent board; vast branch network and presence in high growth segments of micro lending, retail and SME banking. Given the high valuations, we recommend our reader-investors to HOLD the stock from a long term perspective.