- Bandhan Bank, an erstwhile micro finance entity commenced commercial banking operations, post RBI license in 2015. It was started as an NGO in 2001 to lend to unbanked women entrepreneurs with a meager INR 2 lakhs.
- It has grown strength to strength and reached deposits of around INR 25000 Cr, loan book of around INR 25000 cr with NIM of 10%, ROA of 4%, Cost to income ratio of around 35% with good asset quality (GNPA – 1.6%), ROE of more than 25%, CASA of around 29.4%, Capital adequacy of around 26.36% touching borrowers of around 12 million by March 2018. These figures speak a lot about the financial strength of the bank which would be one of the best figures in the private banking industry in India that too achieved in a very short time which is a notable one. Its micro lending portfolio accounts for 88% of the loan book and around 97% of the loans are in priority sector lending ( PSL) making it the largest MFI lender in India.
- If we keep aside the financial factors and peep into the reasons for the same and evaluate whether the same can be sustained, we will get to know very interesting things. Following are few of them :
- The key reason behind Bandhan’s success is its founder Mr. Chandra Sekhar Ghosh. He attained deep expertise in understanding the needs and psychology of the poor during his assignment with BRAC in Bangladesh. He realized that an NGO model by itself cannot benefit the poor and it has to be a proper business like model to cater to the sustainable economic advancement of the poor. He understands these people like no other.
- Under Mr.Ghosh, Bandhan has built its business as a Relationship based Responsible lender catering to poor passionate women entrepreneurs. No women borrower sees Bandhan as a lender but as a genuine financial partner. The stickiness of the customer is something which might be unprecedented in the banking industry making it an excellent franchise just like any top consumer facing brand like D Mart. Women are lent only for business purposes through Self Help Group (SHG) model only to an extent required for their business after careful evaluation of their business. Every women borrower has pride in being associated with Bandhan (One example is where women are taught how to do a signature before lending to them so as to improve their literacy levels .Any Bandhan executive must call women borrower as “Dhidhi” and the talk of loan repayment has to be the last once they have to discuss even in times of default.). Any new loan is given only after evaluating the whether the earlier loan gave the borrower the returns as promised at the time of taking the first loan. This kind of approach made Bandhan a part of the borrower’s family rather than just being a lender.
- Bandhan’s backbone is the 2,663 DSCs (Door Step Service Centers) which are located near to the borrower. The executives at DSC play a vital role in evaluating credit worthiness, forming SHGs, sanctioning loan, collections, advising the borrowers to solve her business problems ( acts like a mini VC fund manager who actively advises its investees monitoring their business) etc. Every borrower’s house is visited by DSC head while evaluating the credit worthiness. A Bandhan executive meets the borrower at least 50 times a year. There is no pressure on DSC to grow the loan book. Generally a DSC targets reaching 3000 borrowers in 3 years time. Current average ticket size of loan is around INR 30,000.
- Bandhan has a lazer sharp focus on various aspect of the business like, what kind of investors it want as an MFI ( only long term oriented developmental finance institutions like world bank , SIDBI , GIC are allowed to invest) , what kind of employees it want as executives ( no incentives based on loan book at all to ground level executives, only fixed pay is given), what kind of training in business and culture is required for staff ( key for the success of Bandhan- have around 9 training centers across India) , what kind of cost should the DSC incur ( Mr.Ghosh has gone to the depth of what kind of chairs should the DSC have, How many pens/papers etc should the DSC buy in a month etc), what kind of business strategy shall Bandhan have as a bank ( Bank aims to collect the deposits from metros and lend it to passionate and hard working women entrepreneurs in rural areas and the huge deposit base of INR 25000 cr is a testimony that they are in right direction- cost of funds have come down from earlier 11% drastically and some benefit of reduced cost is passed on to borrowers already)
- Ever expanding Moat:
- In a country where 60% of bank credit is given to only 60 business families, Bandhan is a contrarian lending to otherwise unlendable poor women entrepreneurs who are passionate, responsible and hard working. They never miss an installment despite being a collateral free loan without a genuine reason and will repay at any cost as Bandhan trusted them by giving a loan while no other financial institution came forward and lent to them. Hence there is ultimate stickiness and the loan book of an individual grows along with their repayment and hence once a customer will be a customer for life with Bandhan (currently 12 million). Around 90% of the micro finance loans are taken by repeat customers. A very strong franchise value exists.
- As the of DSC’s increase the number of lifelong customers increase widening the moat. Currently 2,663 DSCs are present. Around 60% of them are in north east and east parts of India and hence there is huge head room for growth as India is having abundant lendable women entrepreneurs across the nation.
- So moat expands both vertically ( increase in loan amount of single customer as repayment record improves) and horizontally ( penetration into new areas through DSCs)
- As the amount of MFI loans increase, Bandhan can make more money on the interest income quickly. MFI customers make weekly installment payments to Bandhan. So Bandhan can lend the money received through interest income received to another borrower and earn further interest income. Hence Bandhan can put its money to work much better than any other normal bank where there will be monthly interest payments.
- More over almost all banks are in the game of lazy banking, they like to lend to customers for longer periods to avoid finding new credit worthy borrowers very often. But Bandhan is in the business of crazy banking where it lends to its MFI borrowers only for a period of 1 year (max 2 years). Bandhan has to find credit worthy borrowers on a dynamic basis and it mastered the same which pays a premium to Bandhan. Another financial institution which does crazy banking is Bajaj Finance and the financial success of the same is well known. Due to this, Bandhan is able to give higher interest on short term deposits to its customers through innovative FD schemes and this is helping Bandhan to attract more and more deposits. More over the recent scams/ negativity of public towards public sector banks and select private sector banks is going to help Bandhan to achieve the deposit growth. Bandhan’s campaign targeting urban people telling that their deposit is going to bring livelihood to rural women entrepreneurs should also help its deposit growth.
- There is no threat of higher interest rates at all. One reason being able to accept deposits as a bank which reduces cost of funds and second being Bandhan has the ability to pass on the increased cost of funds (if any) to borrowers maintaining the NIM of 10% (Mr.Ghosh has mentioned in an interview that interest rates should not be too low also to MFI borrowers as it leads to making them as money lenders. If given at low rates, they borrow at low rates from Bandhan and lend to people outside defeating the very purpose of MFI institution. Hence it can be assumed that NIM can be comfortably maintained)
- In addition to the above, when all the other private banks are afraid to lend to this particular category as MFI requires special skills and the same can’t be approached from a banker’s perspective, Bandhan pioneered the culture to lend to poor in a low cost model. Even the small payments banks which are converted from MFIs are also looking to drastically reduce their exposure to MFIs where as Bandhan is determined to continue it. Demonetization affected drastically almost every MFI lender in the country barring Bandhan which showcases the robustness of the business model.
- Bandhan will transform from a single product lender (MFI loans) to multiple product lender (SME loans, 2 wheeler loans, Gold loans, affordable housing loans etc along with MFI loans). Bandhan also will venture into selling third party products like insurance, mutual funds etc to its loyal customer base. Bandhan also earns handsomely through IBPC (Interbank Participation certificates) to other PSL non compliant banks. But as per Mr.Ghosh, Bandhan is not in a hurry to do so as he is clear that all his MFI staff has to be trained adequately for the retail banking journey and he has started making steps towards that. Almost 50% of the branch managers of bank are from their MFI business and Mr.Ghosh says happily that they are doing a great job already as bankers.
- Along with the above, Bandhan has Mr.Ghosh who is honest, ethical, principal oriented, humble and hungry entrepreneur who knows his business in and out. He has skill of identifying the right people for the job and also grabbing the right person whenever he comes across one.
- Risks :
- Geographical concentration towards Eastern and North eastern parts (68%). Any natural calamity/ any specific area related adverse macro events may impact the collections and profitability – Presence in this region might be an advantage too as other banks are very sparsely present there giving an edge to Bandhan. Bandhan is anyway working on expanding to other parts of India.
- Higher promoter holding (82%) which needs to be reduced to 40% by Aug 2018- Bandhan is requesting RBI for more time to comply with the same.
- Asset Liability Mismatch may arise as most of the MFI loans are of short tenure of 1 year (max 2 years). If Bandhan is unable to find credit worthy borrowers, it might cause a problem. This depends on executing Bandhan’s expansion plans to newer regions.
- Cultural issues during the transformation from an MFI to an universal bank is something which needs a proper planned approach. Bandhan is completely aware of this and aggressively training its MFI staff regarding retail banking operations.
- Parameters to track every quarter:
- No. of DSCs: Loan book is directly related to this. In the past 2 years, Bandhan has added on an average one DSC/day. More the DSCs more the borrowers Bandhan can touch for life time
- No. of branches: Deposits growth which is important for low cost funds depends on this.
- CASA ratio- As cost of funds is dependent on the same
- Net Interest margin ( NIM)
- Expense to income ratio
- Any information related to robustness in training of employees and increase in number of training centers. This directly affects the quality of loan book as they are the backbone to identifying credit worthy borrowers
- Single product lender to Multi product lender: As this is critical for the growth of loan book. SME lending has to be keenly watched as this also an area where there is huge vacuum which if Bandhan cracks can be a sustainable growth driver.
- NPA ratios: As this tell us about the asset quality
As Indian economy is poised to be the fastest growing economy in the world with GDP growth of around 8%, banks could grow by at least 2.5 times of that. The current situation of losing credibility day by day by public sector banks and select private sector banks owing to various scams leaves good amount of head room for growth for Bandhan over and above 2.5 times GDP growth. Mr.Ghosh is confident of achieving a growth of 30% YOY over long term and is determined to make Bandhan a pan India lender in the future. Considering the factors leading to ever increasing moat as mentioned above, the future looks very promising for the contrarian “Bandhan”.
I may not be able to tell the price target for the share but as long as the above parameters are showing healthy signs, Bandhan could be another HDFC in terms of long term growth coupled with a very strong franchise value like a reputed consumer brand such as D mart/ See’s candies which should be a great combination. Hence I have a strong conviction that this could be a multi bagger in the long term.
Disclosure: I am invested in Bandhan through IPO route. Nomura has bought close to 1% of Bandhan bank on the listing day from open market. I am not a SEBI registered advisor. This is not a stock recommendation. Please contact your financial advisor and take his advice before investing.
CA Sunil Kumar Chirlamcherla