Bandhan, IDFC chart divergent paths in banking

It has been a different experience for India’s newest universal banks, Bandhan Bank and IDFC Bank, which completed their first full financial year of operation in March.

The Reserve Bank of India (RBI) issued licences to these banks in 2014 in order to expand financial inclusion and they started operations by August 2015. 

Bandhan, incorporated as a microfinance institution, and IDFC, formerly a term lending institution for the infrastructure sector, have different legacy issues. Bandhan Bank has an established base in retail banking while IDFC Bank has a big bad debt problem.

IDFC Bank has managed to reduce these stressed assets significantly. The Mumbai-based bank has improved the share of retail banking in its lending portfolio and has a three-year plan by when it wants the retail and corporate portfolios to be of equal size. 

The share of infrastructure in IDFC Bank’s total loan book is still heavy at 54 per cent; however, this is an aggressive reduction from 72 per cent in the December quarter.

Bandhan Bank remains focused on microfinance loans — 91 per cent of its lending is to microfinance firms — and is largely concentrated in the eastern part of the country. It is way ahead of IDFC Bank in branch network with a presence in 33 states and Union Territories through a network of 840 branches, 2,443 doorstep service centres and 282 ATMs. 

IDFC Bank works through other channels and till March had 8,613 customer points-of-presence, which included 74 branches, 47 ATMs, 5,661 micro ATMs, 2,481 Aadhaar Pay-enabled merchant points, and 350 business correspondent outlets.

Again, Bandhan Bank is not keen on lending to corporate clients, who IDFC Bank considers as important, but for working capital and other fee-based products.

The philosophies of the two banks also differ. Rajiv Lall, managing director of IDFC Bank, wants to build a “mass retail bank”, whereas Chandra Shekhar Ghosh, managing director of Bandhan Bank, says his focus is the unbanked.

The Kolkata-based bank wants to find a balance between micro-loans and other small-value loans. For IDFC Bank, the approach is much like existing private sector banks, as the model is built mainly around retail. The bank sold Rs 2,000 crore worth of past loans to asset reconstruction companies in the fourth quarter. 

Analysts say Bandhan Bank’s concentration on microfinance could turn risky if the sector gets into trouble. IDFC Bank’s approach in diversifying its loan portfolio, in the long run, could be the better model. 

Both have a similar cost of funds of about eight per cent, but IDFC Bank’s yield on advances is like any other bank at nine per cent. Bandhan Bank has a big portfolio of priority sector loans and this boosts its margin. Bandhan Bank has a net interest margin of 10, against IDFC Bank’s 2.1 per cent.