Bandhan Financial Services: Profitable growth, wide reach are strong pillars

Much of Bandhan's success is due to its low-cost structure

Bandhan Financial Services Private Ltd has grown furiously in the last four years. In March 2010, it was less than half the size of SKS Microfinance - the largest small lender in the country at that time - and was nowhere in the list of the top three. But by December 2011, it was almost double the size of SKS Microfinance.

The gross loan portfolio of SKS Microfinance on December 31, 2013, was a shade over half of Bandhan's Rs 5,112 crore. Bandhan has more than five million borrowers in 22 states and Union Territories and is expecting a net profit of Rs 250 crore in 2013-14, up from Rs 200 crore a year ago, according to its chairman and founder Chandra Shekhar Ghosh.

Much of the success owes itself to a low profile and steady growth. Before the microfinance crisis of 2010, when most big lenders were in a rush to list, Bandhan resisted the temptation. During and after the crisis, it maintained its profit growth.

In 2011, the International Finance Corporation, the investment arm of the World Bank, picked 11 per cent stake in Bandhan for nearly Rs 135 crore-pegging its value at Rs 1,227 crore. The only other institutional investor in Bandhan is Sidbi, which holds 10 per cent stake.

Ghosh owns about 1.8 per cent and the balance is vested in two trusts, the Financial Inclusion Trust and the North East Financial Inclusion Trust.

  Bandhan charges 22 per cent interest for its smallest loans of up to Rs 15,000 and bigger ones between Rs 16,000 and Rs 50,000, which together form over 97 per cent of its portfolio, according to the Icra's rating document of its recently issued non-convertible debentures.

However, Ghosh had earlier said if granted a banking licence, the rate of interest would come down.

"Lending rates will be reduced by six-seven per cent, as the organisation will be able to take deposits," Ghosh had said earlier.

That may not be difficult. While Bandhan's cost of funds is close to 12 per cent, it was able to report interest spreads of 10.5 per cent and a net interest margin of 10.3 per cent during the first half of 2013-14, according to Icra. Operating expenses of the company have remained lowest among similar microfinance institutions (four per cent in the first half of 2013-14), supported by low branch costs, a decentralised business model and head office staff accounting for less than 1 per cent of the total employee base, adds the Icra rating.

Bandhan had a capital adequacy of 21.1 per cent and gross non-performing assets of 0.1 per cent in March 2013.

The Bengal-based microfinance institution has grown manifold since its inception in 2001. Its roots lie in a society named Bandhan Konnagar, which began lending in 2002.

In May 2006, Bandhan acquired a non-banking finance company, Ganga Niryat Pvt Ltd, which was incorporated in 1995, and rechristened it Bandhan Financial Services Private Limited. This was converted into a non-banking finance company (microfinance institution) in September 2013.