C S Ghosh, founder of Bandhan Bank, believes his unique business model is not comparable to any financial institution in India -- neither small finance banks, nor big private sector banks -- and hence the valuations are justified.
A strong connect with retail borrowers has often been seen as Bandhan's strategy as a microfinance institution and then as a bank.
Its upcoming IPO is somewhat a manifestation of that ideology.
A financial institution with less than three years of operation is not allowed to have more than 25 per cent of retail and HNI participation in an IPO.
Bandhan has got special permission from Sebi to have this limit up to 50 per cent, with 35 per cent of the net offer reserved for retail individual customers.
“We do see our retail subscribers are our future customers. This way we want to brand our bank,” says, Sunil Samdani, chief financial officer, Bandhan Bank.
In its IPO filing, Bandhan Bank has valued itself at about Rs 45,000 crore -- higher than any public sector bank, except State Bank of India.
C S Ghosh, the founder of Bandhan Bank, believes his unique business model, much of which derives its strength from millions of rural borrowers, is not comparable to any financial institution in India -- neither small finance banks, nor big private sector banks -- and hence the valuations are justified.
“Who are we comparing Bandhan with? Our business model is unique. The valuation is at par with our position and status in the sector,” says Ghosh.
At a time when gross NPA of public sector banks are at 20 per cent, Bandhan’s gross NPA is less than 2 per cent.
Many of its closest comparable peers in the microfinance sector graduated into small finance bank, but several of them too are facing high NPAs on account of debt waiver and demonetisation.
Bandhan’s net interest margin is one of the highest in the industry at 9.9 per cent.
The bank’s cost of funds has come down from around 11.50 per cent three years back to 7 per cent at present.
A strong microfinance base, close monitoring of loans, low operating cost and strong customer connect are often been cited as reasons for Bandhan’s success so far as a financial institution.
Nearly 96 per cent of the bank’s advances and loans of Rs 24,400 crore is for priority sector lending.
The frugality in the cost of operations for Bandhan can be assessed from small details of its daily operations.
Since inception, at Bandhan, it is a norm that a branch manager gets a plastic chair with armrests, while credit officers get chairs without armrests, to reduce cost.
Today, more than half of Bandhan’s field staff comprises standard-XII pass-outs, entailing a low cost structure for the bank.
However, as a listed bank, Bandhan faced several challenges.
While competition is getting stiffer in the microlending space, as several private banks have joined the bandwagon, complying with regulations is an imminent challenge.
The first major challenge for Bandhan Bank is to reduce promoters holding. Post the IPO, promoters holding in Bandhan Bank will go down to 82 per cent from 89 per cent at present.
RBI norms require it to bring down to 40 per cent, and Sebi rules call for one year lock-in period for promoters after IPO.
Bandhan in all possibility will now have to knock on the doors of regulators to extend the deadline to comply with the norms.
“We will do whatever the regulator guides us,” says Ghosh.
Further, Bandhan aims to raise about Rs 4,500 crore from the upcoming IPO -- a fund which it needs to deploy for growth.
So far, Bandhan has been conservative in lending, and much of its assets are restricted to microfinance. Now, the bank will be forced to look beyond microfinance, while keeping strong tab on NPAs.
“We want to brand us as a universal bank, we are not going to compromise on that.
"We would like to go wherever there is credit demand.
"First, we need to meet the credit need of our existing microfinance customers.
"Next, in between the segment of existing customers and corporate client, there is a layer of small and medium business houses. So we want to become a banker to them. It is still not well penetrated in the banking sector,” says Ghosh.
In fact, as a bank in the last three years, Bandhan saw 2.2 million new customers opening account, and of its deposit pool of Rs 25,000 crore, 94 per cent of this came from new customers.
“For last 17 years we have the experience of judicious lending. Our strengths are connect with the rural people and their credit analysis, we will use this skill. In fact for the last three years, our year-on-year growth was 50 per cent.’’
Bandhan is treading on a tight rope -- banking on the lowest strata of credit market for its ambitious IPO, an experiment which might reveal interesting outcomes.
Photograph: Rupak De Chowdhuri/Reuters.
