'Existing banks are fighting to cater to the same customer segment'

The Reserve Bank of India has received 26 applications for banking licences. The applicants include Bandhan Financial Services, a microfinance institution with a loan book of Rs 4,500 crore. Chandra Shekhar Ghosh, Bandhan's Chairman and Managing Director, spoke with Suprotip Ghosh about the challenges new banks could face and why the microlender fits the bill for a bank licence. Edited excerpts from an interview:

Do you think that it will be a challenge for new players to grow their banking operations?
Of course, it is a challenge. But the other part is that 50 per cent of India's population does not have a bank account. So, if any bank is targeting that 50 per cent, it is definitely a big opportunity. From Bandhan's perspective, we already have 46 lakh customers. About 80 per cent of those are in unbanked or underbanked areas. In that sense, our customer segment is totally different, so there is no chance of competition with the existing public-sector or private banks.

We are there in 18 states. We are focusing on the eastern region including the northeast. Eighty per cent of the portfolio is in West Bengal, Tripura, Assam and Bihar. If you see national data, public-sector banks' customer base has been coming down a little bit over the last three years. In the private sector, it has increased a little bit. The perspective is that existing banks are fighting to cater to the same customer segment. Big customers and small customers are very different. Big customers deposit money with you because you pay them more interest. If a second bank offers more interest, the depositor will change the account. But for poor people, those who are depositing Rs 100 or Rs 500, they are not changing their account from one bank to the other for the interest rate. So there is a huge area our existing banks are not yet catering to. This is the opportunity for Bandhan and its type of service.

In the past, new generation private-sector banks brought in new technology, exploited retail banking and brought in service culture. That was a big differentiator for ICICI Bank, HDFC Bank or Axis Bank. How will you create differentiation in the market?
Most banks are working in urban areas. More than 75 per cent of our branches are in unbanked areas. More than 5,000 villages where we are working are in these unbanked areas. The other difference is with the RRBs (Regional Rural Banks). The RRBs are supposed to do the same things that we are doing now. But they are providing banking services inside the bank branch. We are providing services at people's doorstep. Poor people, the segment we cater to, want to deposit Rs 100. They want to deposit their money and not bear the travel cost.

Also, people do not want to stay in rural areas always. They want to transfer their families to urban areas. So if they won't stay there, how will they know about local people? That is the problem with banks and their staff. They are not from the rural areas. But in our branches we only employ local people. If we recruit from cities, they will not stay in villages. But people from rural areas will, and if required, they can be easily transferred to urban branches.

In the banking sector, there is a large number of staff working in the back office and a small number of people in the front office. Front office means interaction with the customer.  We have a large number of people in the front office and a small number of people in the back office. That means, every week we are interacting with our customers. That means we meet 46 lakh customers every week. So in that sense, we are very different from RRBs and other banks.

We are fully computerised. Some areas are online, where connectivity is good, but some areas, we still aren't quite there. From a bank perspective, the technology is widely available in India. Earlier, you'd need to train people and familiarize them. Now it is much easier. People are familiar and the technology is available.

There are no success stories of a non-banking finance company (NBFC) seamlessly converting into a bank. Do you agree?
NBFCs and microfinance companies are different. NBFCs assess their books in terms of the amount of money. In microfinance institutions, we assess the number of clients. How many clients do we have? In an NBFC, there is a huge book size but a small number of clients. But in microfinance, we have a small amount of money but a very large client base. Most banks started with a few corporate clients but failed to sustain when it came to retail. This means they aren't able to serve a large number of people. But in Bandhan's case, we are already serving a large number of people. So we can, if we want, easily cater to some corporate accounts.

For NBFCs, there are several challenges for managing a transition to a bank. What is your assessment on managing the transition?
Microfinance is not a very old sector. Our operations are new and the government has only just started giving us importance. Of the 22.9 per cent we charge our customers, 13 to 14 per cent we have to pay to the bank when we borrow. So whatever we raise from customers, more than 50 per cent will go to the bank. Because microfinance is a doorstep service, the cost is high. There is no cost borne by the borrower. All of it is borne by the microfinance institution (MFI). If we calculate the cost of travel of the customer that is to be borne by the bank, the bank interest rate will also be higher. Because the customer is bearing the cost of travel, the bank's interest rate appears lesser than that of the MFI. If we can't reduce the interest rate, if we can't deduct the cost of funds, we can't reduce the lending rate. So interest rates can't be reduced, and the problem cannot be resolved if we can't become a bank. We can take deposits if we become a bank. If we can take deposits, we don't borrow money. And as per as our calculation, we can instantly reduce the interest rates by nearly 10 per cent. The RBI knows this as well. There is a thought process in the RBI that feels, why not let MFIs become banks if they can prove that they are equipped for it? The finance minister feels that without microfinance institutions, financial inclusion will not be possible.

Transformation to a bank is a very challenging job, but it is possible. In 2001 we started as an NGO. By 2009 we shifted to an NBFC, and we know how it can be managed. Now if the time has come to transition from an NBFC to a bank, it is even tougher. But we can solve it if we are systematic on this matter. We already are following a bank system. And the one-and-a-half years that the RBI is likely to give, it is enough to build up capacity. Of course, there is investment needed, but this investment is also a long-term investment. This will enable us to pass on the benefit to customers. Also, there is a considerable outsourcing opportunity. You can outsource technology, management, in different fields allied to banking. People are quite skilled. Other than this, we have started a three-month course for our mid-level management staff. A total of 125 people will be trained this year. All the teachers have come from IIM Ahmedabad, University of Calcutta and Jadavpur University. We have already started building up capacity of staff who will be able to run this type of transformation.

The prudential norms for NBFCs are quite relaxed. For example, the recognition norm for non-performing assets (NPAs) is 180 days versus 90 days for banks. Is there a challenge here?
It is a challenge. We don't have a good treasury department. We do not need to deal with money market operations. Clearly, we have to recruit people on that front. As for the RBI norms on NPAs, we already are practicing 90 days. Our repayment rate is 99.5 per cent and the portfolio at risk is at 0.16 per cent, which is very low as compared to banks. The 90-day provisioning is not needed to cover this 0.16 per cent. After becoming a bank, there will be a change in the client profile. Even after that, if for example the NPAs increase to two per cent, the buffer is 1.5 per cent. Since we meet the customer weekly, there is lesser chance of default. You are right when you say that when we become a bank the scenario will change. We have already recruited eight people from different banks -- private, public and foreign. They are working with us for one-and-a-half years. They are helping us build a system, as a bank, and also to build capacity of senior management.

Many existing applicants have decades of experience in lending with little experience in raising retail deposits.  Is that a critical gap in expertise for aspirants?
Our cost of operation is low, but compared to banks it is high because now one staff is selling one product, which is credit. When it will become a bank, he will be selling four products at least -- credit, savings, insurance and remittance. Automatically, my returns will enable me to pay a commensurate package. That way it is not a challenge, though for the first three years, it will remain a challenge. Within five years we expect this to be under control. Now, for example, one of our staff is holding Rs 40 lakh in asset. When it will become a bank, he will hold a business of, for example, Rs 10 crore, so that is a huge difference. Even if they manage to sell Rs 2 crore apiece, it is about five times their current holding. Automatically, my income has increased. And this can help me meet this increased expenditure. Our number of employees will increase a bit. We have also decided to recruit people from various banks.