BANDHAN CASE STUDY

PREPARED BY :
Bakshi Satpreet Singh (10MBI1005)

1. Why are MFIs required? Highlight the

special role of MFIs in developing
economies?

MFIs are required because these organizations provide hard-tofind financial services to local individuals and groups. MFIs aim
to promote economic activity among low-income earners, for
whom access to official banking services is impossible or nearly
so.
An MFI's reach can vary tremendously. One institution could
serve a hundred clients while another MFI, such as Grameen
Bank or Bandhan, could serve six million.
The special role of MFIs in developing economies are :
- Create sustainable activity to increase their income .
- Reduce external Shocks
- Improve living condition of entrepreneurs and their family.
- Empower people and mainly woman

2. How has Bandhan achieved its

scale since its inception?

Bandhan primarily lends to women who organize themselves in

groups of between 10 and 20 members.
The loan is given to the individual members. The group acts as a
control mechanism which ensures that members do not make willful
defaults.
Bandhan as a banking entity would be access to low-cost current and
savings account deposits at five to six per cent, which will reduce its
cost of funds and help scale up lending to poor.
Bandhan borrows from banks at interest rates as high as 18 per cent,
which means it charges 20 to 25 per cent per annum from small
borrowers.
Bandhan had distinct functional business units with clearly
demarcated roles and responsibilities to look after its operational needs
Entire model is based on simplicity and customer centricity . A
borrower does not come just for a lower interest rate, they come for the
relationship.

Bandhan followed a group-based approach for extending

financial services. The loans provided to Do Not Cop customers
were unsecured loans and were not backed by any collateral.
Therefore, the involvement of a co-borrower reduced the risk
for Bandhan because the co-borrower put peer pressure on the
borrower, which encouraged them to pay on time. The loans
were repaid on a weekly, fortnightly or monthly basis.

3. What are the factors constraining

Bandhan and the scope of Bandhan
to remain viable as a NBFC-MFI?
Evaluate these with consideration
of the crises in the MFI ?

Excessive reliance on West Bengal (now 49.12%) in the

portfolio and hence issues with dealing with diverse socioeconomic, agro climatic and linguistic environment as Bandhan
sees rapid expansion .
Excessive hierarchy in the system
Housing system of Bandhan : That means Bandhan must
discover the trade-off and dynamically adjust its trusted policy
in a changed context
Apparently increasing transaction and transformation cost of
the organization with increased complexity of the regulatory
system.
A relatively isolated R & D system
Relatively new exposure to Information Technology which
would be a backbone in maintaining a national profile.

Market space opening for credit plus services like health,

education etc.
Strong brand image reinforcement in the times of financial
crisis
Can rewrite the agricultural loans as priority sector lending
portfolio to commercial banks (Bandhan has a strong experience
in that sector)
International markets for MFI based on the Indian experience
and reputation which Bandhan has acquired : The apparent
success of Bandhan in Eastern and North Eastern part and the
opportunity to prove the same across the entire country, would
be vital in setting up an international platform.

4. Should Bandhan transform into a Bank?

What are the implications of this for its
vision. Mission and the organization?

Yes , Bandhan should transform into a bank because

Strong experience in maintaining customer relationships and
loyalty .
Presence of Research Expertise
Experience across the value chain of financial products .
Range of partnerships across multiple banks (37 as on 31-032013); indicates strong financial backbone and diverse
partnerships .
Strong organizational ethics and respect for the client
.Recognition by independent agencies .
Bandhan has a history of providing value adding services .

The transition to a bank, however, is not going to be easy. Banks have

mandatory obligations - there is priority-sector lending, there is the
requirement of rural branches, there is statutory liquidity ratio (SLR) and cash
reserve ratio (CRR) to be maintained which basically means leaving assets
idle.
So they will have to set aside 23 per cent of its funds as standing liquidity
ratio.
Bandhan set up in April 2001, has been helping relatively poor people in
areas of the country where banks hardly exist, with bulk of the loans ranging
from a minimum of Rs1,000-Rs50,000 invested in small businesses such as
tailoring, fish and vegetable selling, running small provision stores and so
forth.
When you work in rural areas, trust matters the most. Over 13 years, we
have built a great reputation and brand. It's our strength and we will use it to
its full potential. At present, we are also developing a mechanism to gauge
which customer we need to cater to and whether we have to service them at
their doorsteps or bring them to the bank
Bandhan is expected to rely on government-backed Credit Guarantee Fund
Trust for Micro and Small Enterprises to cover the risk in the unsecured
lending portfolio in this segment

5. Is Bandhan ready to be a bank? What

challenges do you envisage Bandhan would
face during such a transformation? How
Bandhan can overcome them?

Yes , Bandhan ready to be a bank .

Bandhan field staff members were trained in microcredit
activities but lacked the experience of savings mobilization.
challenge was in converting them to barefoot bankers. Also,
the integration of the existing field staff with highly skilled bank
branch employees was likely to be a tough task.

Bandhan operated in remote locations, with 80 per cent

of its operations in rural areas and 45 per cent in unbanked
areas. 36 Rural India still happened to be largely underconnected and suffered huge power shortages. Giving
Bandhans business an online capability could be a
challenge.
Bandhan currently working in an offline mode, data
transfer and migration to the core banking system (CBS)
would be a challenging task.

Bandhan can overcome by following :

Better Training facility for employees
Outsourcing : Save cost.
Go for fresh recruits , hire from campus .
IT services help

6. What should be the transformation plan for

Bandhan to get converted to a bank?

Start off with 600 branches.

The 58 lakh existing micro-finance customers will be transferred
from the micro-finance outfit to the new bank and all of its customers
would be provided with banking infrastructure.
Focus will be on financial inclusion. They will continue to service
existing customers. In addition, they will be able to reach more
micro-credit customers.
To use SMS tech for rural banking.
The bank will diversify operations to include a range of products
such as savings, remittances and payments, with a focus on the
under-banked, according to IFCs project disclosure.
Combined equity commitment of Rs 1,600 crore (Rs 16 billion)
from International Finance Corp (IFC) and GIC, Singapores
sovereign wealth fund.
The proposed investment is aimed at supporting the transformation
of Bandhan to a universal bank, focused on low-income households.