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UNIQUE INITIATIVE
Bandhan plans to play bank to smaller MFIs, lend them money……ANUP ROY & AVEEK DATTA I n f b dia’s fourth largest micro- inance institution (MFI) y assets, Bandhan Financial Services Pvt. Ltd, is plan- ning to be banker to smaller microfinanciers, a first-of-its- kind move.
The idea, said Bandhan chairman and managing direc- tor 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 develop- ment finance institutions such as Small Industries Develop- ment Board of India, or Sidbi. “Of course we will take a risk premium over our cost of funds and keep a margin, but it is not another business oppor- tunity 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 Band- han 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 ev- ery village and it is only logical that chance should be given to the local players there,“ said Ghosh.
Bandhan is present in 17 In- dian states through 1,550 branches and 8,798 staffers. It catered to 3.2 million custom- ers with an outstanding loan book of `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 compa- nies.
“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 com- panies. 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 diffi- cult to keep their interest rates low as their operating expendi- ture 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 ac- countable on their rate of in- terest.
“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 asso- ciation with the World Bank, was working out a common in- formation platform for MFIs, where information can be shared to avoid multiple lend- ing.
“We are in the process of fi- nalizing code of conduct as- sessment 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 sec- tions 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 cap- ital 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 re- striction on such NBFC lend- ing to another. As per RBI guidelines, all NBFCs have to maintain a capital adequacy ratio of 15%. This means for every `100 disbursed, they have to set aside `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 do- mestic 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 Microfi- nance Ltd, India’s largest MFI, has changed the industry sce- nario dramatically. Two more prominent microfinance firms –Share Microfin Ltd and Spandana Sphoorty Financial Ltd–want to list on the bours- es.
Hyderabad-based Share Mi- crofin 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%, de- pending on their ratings.
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