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Bandhan holds its ground with inspiration from a neighbour….Manish Basu
In 12 years, Bandhan has built a loan book comparable with that of the Bangladesh lender that inspired it As a field officer who rose through the ranks to become a senior trainer at BRAC, Bangladesh’s second largest microfinance institution (MFI), Chandra Sekhar Ghosh was hardly, if ever, noticed by founder and chairperson Fazle Hasan Abed.
“I hardly knew him as a worker at BRAC,” said Abed, who was Ghosh’s role model.
Born in 1960 in Agartala, Ghosh completed his postgraduate studies in statistics at Dhaka University before joining BRAC in 1985, which according to the United Nations, is the world’s largest non-government organization.
It wasn’t then such a large organization, recalls Ghosh, but 13 days of training “in the jungles” of Bangladesh created in him a resolve to serve the poor.
Years later, after having “successfully closed down” his family’s hosiery business, Ghosh launched Bandhan Financial Services Pvt. Ltd, his own MFI, in India, following BRAC’s business model. So did many other Indian MFIs, according to Alok Prasad, chief executive officer of Microfinance Institutions Network (MFIN), an industry lobby group.
Bandhan is one of the few micro-lenders to have escaped unscathed from the crisis that hit Indian MFIs when Andhra Pradesh, the country’s biggest market for small loans to the poor, introduced a law in October 2010 that reined in their lending practices.
The law barred MFIs from giving a second loan to an existing borrower, stopped the practice of weekly loan collections and prevented lenders from doing business at their customers’ doorstep. It was introduced following complaints that coercive loan recovery practices by MFIs had prompted some over-extended borrowers to commit suicide.
Abed is proud that BRAC inspired Bandhan, which in 12 years of operation has built a loan book of Rs.3,700 crore —comparable with that of BRAC’s 6,000 crore Bangladeshi taka (Rs.4,091 crore). What is more, Bandhan now is more efficient than BRAC in many ways, says Abed.
Bandhan lends at 20%, whereas BRAC charges 26% on its loans, despite having access to cheap funds from the Bangladesh government. Even Bandhan’s loan recovery is higher at 99% compared with BRAC’s 97%.
“You need innovations to cut costs,” said Abed, impressed by Bandhan’s ability to bring down the lending rate at a time when competitors were struggling to stay afloat.
One of the biggest problems for MFIs in India, compared with those in Bangladesh, is that they do not receive enough donations from abroad, according to Abed. Indian MFIs have to pursue social development programmes with the money they make from lending, whereas in Bangladesh, such organizations receive many donations.
Bandhan sets aside 5% of its profit every year for community development initiatives, according to Ghosh. Its latest initiative is to develop skills among the children of its borrowers—at least one from each family—to make them employable at fast-food outlets such as McDonald’s and KFC, Cafe Coffee Day and retail stores such as Pantaloons.
In 2011—the first year of this programme—Bandhan managed to place some 600 people. In the current year, according to Ghosh, several companies have collectively committed to hire 3,000 people.
BRAC, originally an acronym for Bangladesh Rehabilitation Assistance Committee and then Bangladesh Rural Advancement Committee, originated from Abed’s initiative to resettle refugees of Bangladesh’s liberation war in 1971.
In the first few years, Abed, then an accountant at Shell Oil Co.’s Bangladesh operations, focused on relief efforts, building homes and medical centres, until BRAC—not an acronym anymore—started making tiny loans in 1974.
Social development remains one of the key priorities of BRAC, which has since expanded into 10 more countries. For instance, in Afghanistan, BRAC runs 10 free hospitals, and teaches at least 13,000 girls at schools run by it. It pursues these initiatives with the charitable dollars it receives from international agencies such as United States Agency for International Development (USAID).
BRAC’s microfinance business in Afghanistan, though, has suffered major setbacks on account of the ongoing unrest. It used to be a profitable business, said Abed, and BRAC the biggest MFI in Afghanistan. But the business had to be scaled back significantly.
“No one knows what’s going to happen there after the US forces retreat,” said Abed.
BRAC has suffered similar setbacks in African nations—it operates in countries such as South Sudan, Tanzania and Uganda. “I am disappointed that we have not been able to make an impact in Africa,” said Abed, adding that the business model is now being tweaked. BRAC is looking to lend to small enterprises in Africa rather than to individuals.
BRAC’s entry into African nations received significant funding—Bill and Melinda Gates Foundation, for instance, gave it $15 million (around Rs.84 crore) in grants and loans for launching its operations in Tanzania.
Alongside, BRAC’s African operations received media attention across the world when Abed was conferred knighthood in early 2010.
Alongside microfinance, BRAC runs several enterprises in Bangladesh—it is even part owner of one of the country’s youngest banks. Many of these ventures are dovetailed with its core business of making tiny loans. For instance, it runs a dairy which sells milk supplied by borrowers rearing cows.
That’s something Bandhan hasn’t yet ventured into. Bandhan isn’t big enough to make investments in such activities, said Ghosh, but at the same time, he is looking to make a small beginning by launching in Kolkata something similar to Aarong, BRAC’s upmarket designer apparel stores in Dhaka.
Such ventures aren’t essential for the long-term viability of MFIs, according to Abed. Key to the growth of such lenders is staff training, transparency in management and a long-term vision, he said.
From his days in BRAC, Ghosh learnt to appreciate the importance of staff training, and employees are a key strength at Bandhan.
Because MFIs in Andhra Pradesh paid incentives to their agents to disburse and recover loans, they got into trouble, Ghosh said.
The practice led to aggressive lending, giving poor people more money than they could deploy into gainful ventures.
“You have to put pressure on borrowers to repay,” Abed said. “But that pressure should come from the group and not from the lenders’ workers.”
That’s a reference to the practice of forming groups of borrowers, making each member individually and collectively responsible for repayment of loans.
Giving incentives to agents was one of the problems with MFIs in Andhra Pradesh, according to MFIN’s Prasad, but the bigger problem was their inability to cope with rapid growth.
Those that weathered the storm such as Bandhan are the ones that chose to be conservative, he said.
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