India: Banks Start Offering Loans to Bandhan Financial

Jul 2014
India, July, 09 2014 - Banks are queuing up to lend money to Kolkata-based microfinance institution Bandhan Financial Services, which was among the lucky two to secure a banking licence from the Reserve Bank of India (RBI) in April this year.

According to sources, three banks -Bank of India, Vijaya Bank and HSBC India-have sanctioned loans of Rs 700 crore last month. Mumbai-headquartered Bank of India has given the highest term loan facility of Rs 500 crore at an interest rate of 13.80 per cent. Bangalore-based Vijaya Bank has given Rs 50 crore term loan at a slightly higher 14.50 per cent per annum. And HSBC, one of the largest foreign banks in India, has agreed to offer a working capital loan of Rs 150 crore.

More banks are expected to offer a line of credit to Bandhan, which will soon transform from a non-banking finance company (NBFC) to a full-fledged bank.

The biggest advantage for Bandhan as a banking entity would be access to low-cost current and savings account deposits at five to six per cent, which will reduce its cost of funds and help scale up lending to poor. Currently, Bandhan borrows from banks at interest rates as high as 18 per cent, which means it charges 20 to 25 per cent per annum from small borrowers.

Bandhan has 18 months to create a legal structure as well as infrastructure to set up a full-fledged bank. The company requires funds for creating physical infrastructure, hiring people and also for growing the business in the interim 18-month period.

In the ongoing fiscal year 2014/15, the microfinance institution has set a disbursement target of close to Rs 12,000 crore. This amount will be disbursed as micro-credit loans to small women entrepreneurs, and also micro enterprises or business loans. Bandhan has targeted to borrow close to Rs 4,000 crore from banks and institutions. In addition, it plans to mobilise another Rs 1,000 crore by issuing debentures.

A decade ago, the founder of Bandhan-Chandra Shekhar Ghosh-was struggling to raise funds for his microfinance venture. His business model was to lend only to women in areas where there were no bank branches.

He started a non-governmental organisation and later converted the venture into an NBFC for better access to funds. A banking licence now has opened more doors for him. The first big investor to lend Bandhan after it got the banking licence was UTI International Wealth Creator-4, which invested over Rs 100 crore as non-convertible debentures.

Source : business today

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