Bandhan: How difficult it is to operate as a bank? - Religare Capital Market

Bandhan microfinance converted itself into a bank (universal) yesterday. Media interviews given by Mr. C Ghosh (MD) suggests that it is indeed difficult to convert and operate as a bank. Growth will be much moderate in the short term (in our view, for the first 2-3 years it can lag industry loan growth which is considerably below private sector banks), no scope for margin expansion as they want to pass on every reduction in cost of funds to borrowers. Success depends on creating strong deposit franchise and developing skill set in corporate / SME lending - difficult and will come with experience. Small finance banks will face similar challenges. Following are the key takeaways from the interview given by Mr. Ghosh.

What is the biggest challenge for Bandhan bank?

The biggest challenge is to educate their own customers that Bandhan is now a bank and you can even place your deposits with the company. In addition, large number of customers have very little to save and prefer PSU Banks or post office savings.

Growth will take a hit in near term

Its borrowing from banks is about Rs 90bn, which it expects to repay in the next two to three years. In the next few months, the plan is to be aggressive in taking deposits, while going slow in lending. The industry-wise deposit rate is close to 14 per cent. We would not like to grow below the industry rate. The credit growth rate cannot exceed the deposit rate. So the credit growth target will be decided accordingly.

In our view, deposit growth will not be higher than 20% in the next 1-2 years. After considering run-down of bank borrowings, growth will take a severe hit. Bandhan may grow at much slower rate as compared to other microfinance lenders which have plans to grow at minimum 40%. Similar situation is possible for microfinance companies who are eyeing small bank licence.

Corporate banking plan is on a hold

Mr. Ghosh stated that corporate banking is a different kind of skill, which we are yet to develop. We will continue to focus on rural and semi-urban areas, particularly the SMEs (small and medium enterprises).

Media started pointed out a high interest rate; Bandhan will pass on reduction in cost of funds

Question - Your lending rates are quite high. When do you expect to bring down the lending rates? The base rate will be 12%. Mr. Ghosh replied This will take at least a year. The lending rate will depend on the cost of funds. As and when we have enough deposits to bring down the cost of funds, we will reduce the base rate. We will pass on every reduction of cost of funds to the borrower. Our deposit rates are already a little more than the market rate, which should help us garner deposits.

Mr. Ghosh asked for some relaxation from RBI deputy governor

We will continue to focus on rural and semi-urban areas. However, give us some flexibility," said Ghosh, pointing at H R Khan, deputy governor of the Reserve Bank of India, present at the inaugural function. Ghosh did not elaborate on the relaxations Bandhan seeks from RBI.

Source : Equity Bulls

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