I finished reading “Bandhan - The Making of a Bank” by Tamal Bandopadhyay. This is a good book to read to understand evolution of Bandhan, story of Chandra Shekhar Ghosh. It also covers good content on Vijay Mahajan, so called father of Indian micro-finance and has a chapter on rise and fall of SKS Micro-finance (Now Bharat Financial Inclusion Ltd.). The annexure has history of MFI industry & good coverage of Andhra MFI crisis.
Following are some notes (not an exhaustive review) -
I had often wondered at the speed with which Bandhan Bank has opened branches - 938 as of Q2. That’s almost one branch per day in their ~3 years of history post receiving banking license. (To put this in perspective RBL Bank has < 300 branches & longer banking license). They opened 500 branches on day 1 & it was a world record at the time. Not that they wanted to set world record but this was necessitated because they had ~2200 DSCs where lending activity was ongoing even before they got banking license and the surplus cash generated by these could not have been deposited into other bank once you get banking license. So they had to open so many branches on day 1.
Tamal does a very good job of bringing out differences between SHG (Self Help Groups) vs. JLG (Joint Liability Group) as I did not understand it & history behind it. In both SHG or JLG, a group is formed to create moral & social pressure so that individual does not default on the loan repayments.
The difference in SHG linked lending is - the banks lends to the SHG as a whole and terms of lending internal to SHG members are rather flexible. In case of JLG, individual is the borrower with other members of JLG acting as guarantor to the other borrowers. The MFI industry follows JLG model.
Tamal summarizes the essence of risk management in MFI industry as follows - “risk management is all about keeping the loan amount small, forming a good group and carrying out strong supervision”. The JLG meetings usually happen once every week, usually in the courtyard of leader of JLG. The collections also usually happen at these meetings. The formation of initial group in new territory, training given to credit officers, rules of membership etc. are important qualitative aspects to track if one was looking at risk side of MFI stories.
Bandhan continues the history of meeting every single lender once a week for 52 week despite becoming a bank. The book also provide some interesting rules of group membership like - unmarried or widowed women were not allowed to be the part of the group as when these women get married they change location & it becomes difficult to collect repayments.
The rising ticket size in MFI industry are generally considered a negative, the book brings out a different insight in this matter. It claims that as income rises for the MFI customers (who are bottom of the pyramid), their future needs also rise to support business expansion etc. The book has few examples where borrower had first loan of 3000 & had eight loan of 60,000. So I think ticket size has to be looked in more granular manner - ticket size of first time borrowers vs. ticket sizes of repeat borrowers.
Much has been written about the Andhra MFI crisis and the law that barred door-step and weekly collection. The core causes of crisis were - intense competition amongst MFI/Banks to increase loan book, multiple loans to same person, rising ticket sizes etc. The Andhra crisis resulted in closure of MFI of Vijay Mahajan, the father of Indian MFI industry. It also causes severe pain for SKS which since then has recovered. The situation has improved since then - with regulation from RBI and self regulation from MFIN etc.
Some risks that come to mind and need to be tracked are as follows -
- Political Risk: As of 2015, there were more than 2.5Cr MFI borrowers. These are bottom of the pyramid borrowers, part of JLG and easy target to be patronized by political class. This is what happened in Andhra Pradesh and repayment rates went down from 98% to 10% during Andhra crisis. Having concentration in single state is one of the big risks that needs to be tracked for MFI companies. Hopefully, RBI “closely” regulated entities such as Bandhan Bank or SFBs like Equitas/Ujjivan probably has better survivability than other MFIs. The political risk probably compels likes of Equitas to get into non-MFI assets as these are very well regulated & probably borrower class can be less easily politically patronized.
- Kind of Investors: Because of attractive RoA, a lot of “aggressive” money came into MFI space (as in case of SKS). The whole thing became about money making, higher valuations as against poverty alleviation, upliftment etc. I think it is important to look at money coming into MFI and also one should look for “missionary” promoter/management that stays true to the spirit of MFI lending. I would also look for softer signs where lower cost of funding is passed on to borrowers, anecdotal stories about JLGs, number of JLGs, size of JLGs etc.
These risks are higher in my mind compared to secured vs. unsecured debate. Eventually, high margins and high RoA are the root causes that lead to greed and some unethical behavior resulting in boom/bust cycles in MFI space.
Finally, Mr. Ghosh comes across a very passionate person towards Bandhan with uncommon common sense. The thing that stood out for me was his ability to scale the operation (2200+ DSCs, 500 branches on day 1, liability/CASA profile of the bank etc.) without any significant slippage on quality parameters. (~400Cr exposure to IL&FS needs to be questioned though). He is very cost conscious and his rule books on timings of the branch, culture inside organization, expenses allowed in DSCs and details behind them etc. are very good. He definitely comes across a “missionary” in my book with ability to scale things very fast. How future unfolds needs to be tracked.
Tamal also raises some important questions which we should take note of -
- Most liability side customer prefer a single bank providing entire range of services (asset/wealth management, insurance, credit/debit cards etc. etc.). Can Bandhan build team and expertise in this area?
- There are two cultures in the bank - asset side culture where employees come from bottom of the pyramid, are paid less but associate strongly with the culture created by Mr. Ghosh. The liability side culture requires staff dealing with middle/affluent class clients and where Mr. Ghosh is looking for talent and they are probably better paid. Can these two cultures co-exist in harmony and grow the bank?
- As bank tries to build non-MFI assets, does it have requisite underwriting skills, teams, expertise in place?
Disc - Tracking position in Bandhan Bank, > 5% of portfolio in Arman, no investments in the rest. This is not a buy/sell reco, investors are advised to do their own due diligence.