On D-Day, microfinance firms, NBFCs jostle for bank licences

Written by Vishwanath Nair | Mumbai | Updated: Jul 2 2013, 03:27am hrs
With Monday being the last day for putting in applications for a bank licence, its not just large corporate houses and non-banking financial companies (NBFCs) that are aspiring to set up banks. Leveraging their strengths in facilitating financial inclusion, microfinance companies are trying their luck. Kolkata-based microfinance institution Bandhan and Ramesh Ramanathans Bangalore-based Janalakshmi Financial Services both applied for a bank licence on Friday.

Among the larger NBFCs and corporates that are expected to submit their applications on Monday are Aditya Birla Nuvo, L&T Finance, Edelweiss, IDFC, Srei Infrastructure and Reliance Capital, all of which have the necessary board approvals. The Shriram Group has also said it is keen to apply but Mahindra & Mahindra Financial Services, however, has decided not to set up a bank, citing concerns over the Reserve Bank of Indias (RBI) rigid guidelines.

Janalakshmis loan book is roughly R2,000 crore. The intermediary serves 15 lakh customers and is being advised by its founder and chairman Ramanathan, a former international banker. Bandhans loan book is close to R4,500 crore. We depend heavily on bank funding and, therefore, our loan rate is also high at around 23%. Once we have access to deposits, we should be able to bring down our lending rate by at least 10%, Bandhan CMD Chandra Shekhar Ghosh told FE.

Depending solely on banks for funding, Ghosh feels, is not sufficient to be able to reach out to unbanked areas. As such, its essential, he says, that microfinance companies become banks using the deposit base to fund growth. Of Bandhans 1,804 branches, 80% are in rural areas while 45% are in unbanked regions.

He believes Bandhan will be able to shake off its dependence on bank funding entirely within three to four years. Our 12,000 employees are well trained and have the right skills to go into rural and unbanked locations. Moreover, if we become a bank, we will instantly have close to 46 lakh customers, he says.

According to its final guidelines on banking licences, the central bank requires 25% of the branches of any new bank to be in unbanked regions.

"Execution is the key in banking. We need to figure delivery systems and the technology that goes into making a successful bank. There is a market in the poorer section of our society that is difficult to crack, but microfinance companies are best equipped to take it up," said a senior executive at a leading microfinance company.

However microfinance heavyweights like Basix and SKS Microfinance are expected to stay out of the banking licence race since they would find it difficult to manage a bank after the losses in their Andhra Pradesh business in 2010, sources said. The decision of heavyweights to stay away may be driven by cost considerations among others, explained Alok Prasad, CEO of Microfinance Institutions Network (MFIN), who said existing banks depend on corporate and urban customers for their business, something that was unfamiliar to the microfinance players.