Bandhan is banking on retail for IPO

A strong connect with retail borrowers has been Bandhan’s strategy, first as a microfinance institution and then as a bank. The bank’s upcoming initial public offering (IPO) emphasises it further. A financial institution with less than three years of operation is not allowed to have more than 25 per cent of participation from retail and high-net worth individuals in an IPO.

Astrong connect with retail borrowers has been Bandhan’s strategy, first as a microfinance institution and then as a bank. The bank’s upcoming initial public offering (IPO) emphasises it further.

A financial institution with less than three years of operation is not allowed to have more than 25 per cent of participation from retail and high networth individuals (HNIs) in an IPO. Bandhan has received special permission from the Securities and Exchange Board of India (Sebi) to a increase this limit up to 50 per cent, with 35 per cent of the net offer reserved for retail individual customers.

“We see our retail subscribers are our future customers. This is the 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 around ~450 billion, higher than any public sector bank, except State Bank of India.

CS 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 nonperforming assets (NPAs) of

public sector banks are around 20 per cent of their total advances, Bandhan’s gross NPA is less than 2 per cent. Many of its peers in the microfinance sector graduated to small finance banks, but several of them are facing high NPAs due to 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 costs and a strong customer connect are often cited as reasons for Bandhan’s success. Nearly 96 per cent of the bank’s advances and loans of ~244 billion are for the priority sector. Since inception, it

has been a norm at Bandhan that a branch manager gets a plastic chair with armrests, while credit officers get chairs without armrests. Today, more than half of Bandhan’s field staff comprises Class XII passouts, entailing a low-cost structure for the bank.

However, Bandhan also faces several challenges. While competition is getting tougher in the microlending space with several private banks joining the bandwagon, complying with regulations poses an imminent challenge.

The first major challenge for the bank is to reduce promoter holding. After the IPO, promoter holding will go down to 82 per cent from the current 89 per cent. According to RBI norms, the bank must bring down to 40 per cent. Then Sebi rules also call for a one year lock-in period for promoters after IPO. Bandhan in all possibility will now have to knock 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 looks to raise around ~45 billion from the IPO to fund growth. So far it has been conservative in its lending approach and much of its assets are restricted to microfinance. Now, the bank will be have to look beyond microfinance, while keeping a strong tab on NPAs.

“We want to brand ourselves as a universal bank. We are not going to compromise on that. We would like to go wherever there was credit demand. First, we need to meet the credit needs of existing microfinance customers. Next, in between the segment of existing customers and corporate clients, there are the small and medium business houses. We want to become a banker to them. It is still not well penetrated within the banking sector,” says Ghosh.

In fact, as a bank in the last three years, Bandhan added 2.2 million new customers. Of its total deposit pool of ~250 billion, 94 per cent came from new customers.

“We have the experience of judicious lending for the last 17 years. Our strengths are in connecting with rural people and credit analysis. We will use that skill. In fact for the last three years, our year-on-year growth has been 50 per cent,” adds Ghosh.

Bandhan is treading on a tight rope. It is banking on the lowest strata of the credit market for its ambitious IPO, an experiment which might reveal interesting outcomes.